FINANCIAL SECTOR ASSESSMENT PROGRAM 

UNITED STATES OF AMERICA

IAIS INSURANCE CORE PRINCIPLES

DETAILED ASSESSMENT OF 

OBSERVANCE

MAY 2010

INTERNATIONAL MONETARY FUND

MONETARY AND CAPITAL MARKETS DEPARTMENT
 

4046068
 

 Contents Page 

 

Glossary .....................................................................................................................................3

I. Executive Summary, Key Findings, and Recommendations .................................................4

A. Introduction ...............................................................................................................4

B. Information and Methodology Used for Assessment ................................................4

C. Institutional and Market Structure—Overview .........................................................6

Recent performance ...........................................................................................7

Regulatory arrangements ...................................................................................9

Guaranty funds (policyholder compensation arrangements) ...........................13

D. Main Findings .........................................................................................................14

E. Recommended Action Plan and Authorities’ Response ..........................................21

II. Detailed Assessment ...........................................................................................................26 

Tables 

1. U.S. Insurance Companies—Capital Adequacy ................................................................8

2. Summary of Observance of the Insurance Core Principles .............................................16

3. Recommended Action Plan to Improve Observance of 

 the Insurance Core Principles ..........................................................................................21

4. Detailed Assessment of Observance of the Insurance Core Principles ...........................26

Appendix 

I. Technical Note on Accounting and Actuarial Framework for Insurance .............................68
 3 

GLOSSARY

AAA 

ABCD 

American Academy of Actuaries 

Actuarial Board for Counseling and Discipline 

AICPA American Institute of Certified Public Accountants 

AML/CFT Anti-Money Laundering/Combating the Financing of Terrorism 

APPM 

ASB 

Accounting Practices and Procedures Manual 

Actuarial Standards Board 

ASI Annual Statement Instruction 

ASOP Actuarial Standards of Practice 

ACL RBC Authorized Control Level Risk-Based Capital 

CPA Certified Public Accountant 

ERISA Employee Retirement Income Security Act 

FAST Financial Analysis Solvency Tools 

GAAP Generally Accepted Accounting Principles 

GLBA Gramm-Leach-Bliley Act 

GWP Gross Written Premium 

FATF Financial Action Task Force 

FAWG Financial Analysis Working Group 

IAIS International Association of Insurance Supervisors 

ICP Insurance Core Principle 

IFRS International Financial Reporting Standards 

MoU Memorandum of Understanding 

NARAB 

NICB 

National Association of Registered Agents and Brokers 

 National Insurance Crime Bureau 

NIPR National Insurance Producer Registry 

PCAOB Public Company Accounting Oversight Board 

RBC 

RIRS 

Risk-Based Capital 

Regulatory Information Retrieval System 

RRG 

SAD 

Risk Retention Groups 

Special Activities Database 

SAO Statement of Actuarial Opinion 

SAP Statutory Accounting Principles 

SMI 

SSAP 

Solvency Modernization Initiative 

Statements of Statutory Accounting Principles 

SVO Securities Valuation Office 

TAC Total Adjusted Capital 

TALF Term Asset-Backed Securities Loan Facility 

TARP Troubled Asset Relief Program 

TRIA Terrorism Risk Insurance Act 
 4 

I. EXECUTIVE SUMMARY, KEY FINDINGS, AND RECOMMENDATIONS

1. Insurance regulation in the United States, which is mostly carried out by states, 

is generally thorough and effective, although there are areas where significant 

development is needed. Strong regulation contributed to the overall resilience of the 

insurance sector during the financial crisis. There is generally a high level of observance of 

the Insurance Core Principles. Aspects of regulatory work such as data collection and 

analysis in relation to individual insurance companies are world-leading. There are 

mechanisms to ensure individual states implement solvency requirements effectively. 

However, there is a need for development of the policy framework in relation to insurance 

and financial stability and international issues; and for extensive reform to the laws 

governing state insurance departments, including on appointment and dismissal of 

commissioners, to secure the independence of regulatory work. The approach to supervision 

of groups needs significant development. 

A. Introduction 

2. This assessment of the U.S.’s compliance with International Association of 

Insurance Supervisors (IAIS) Insurance Core Principles (ICP) was carried out as part 

of the 2010 U.S.A., Financial Sector Assessment Program (FSAP). The assessment was 

carried out by Tom Karp, insurance expert and a former Executive General Manager, 

Australian Prudential Regulatory Authority, and Ian Tower, Monetary and Capital Markets 

Department, IMF. 

3. While insurance regulation is principally a responsibility of the states, the 

assessment addresses national compliance with the ICPs. Regulatory responsibility is 

shared by 50 states, the District of Columbia and the five U.S. territories. Although certain 

departments of the U.S. government maintain an interest in insurance, for example in relation 

to external trade (where states have no authority) and anti-money laundering, federal 

authorities have limited regulatory powers over the insurance sector. This assessment 

addresses insurance regulation nationally and does not assess individual state authorities. 

B. Information and Methodology Used for Assessment 

4. The assessment was based on information available in November 2009 at the 

time of an FSAP mission. The National Association of Insurance Commissioners (NAIC) 

contributed a self-assessment and further information in response to requests before and 

during the mission. Documentation, including relevant laws and regulations,1

 was supplied. 

The assessment has been informed by discussions with regulators and market participants. 

The assessors met with staff from the NAIC and with selected insurance commissioners2

 and 

 

1

 The model laws of the National Association of Insurance Commissioners were the main documentary resource 

for this assessment but the assessors have also referred to select individual state laws. 

2

 The term ‘insurance commissioner’ is used throughout this report to refer to the most senior official 

responsible for insurance regulation in each state, district, or territory. Actual titles vary. 
 5 

their staffs; with government, insurance companies and intermediaries; and with industry and 

actuarial bodies. The assessors are grateful for the full cooperation extended by all. 

5. The assessment was based on the 2003 version of the IAIS Insurance Core 

Principles and Methodology. It took into account relevant IAIS standards and guidance in 

addition to the ICPs. The assessment of ICP 28 (anti-money laundering, combating the 

financing of terrorism (AML/CFT)) has been informed by the assessment carried out in 2006, 

of U.S. compliance with the Financial Action Task Force (FATF) AML/CFT standards, 

using the 2004 Methodology.

6. The approach to this assessment reflects the large market size and state-based 

system of insurance regulation. As the assessment addresses national compliance and the 

assessors were not able to hold discussions or review material from more than a few state 

authorities, reliance has been placed on discussions with:

• NAIC staff on regulatory practices across the states, based on an NAIC selfassessment which addresses compliance with the ICPs for the United States as a 

whole; and on the processes and procedures used by the NAIC (i.e., the 

commissioners of insurance acting collectively and the staff of the association) in 

their support for state regulators (see paragraphs 20 to 21); and

• A selection of insurance commissioners and their staff in the states of Illinois, Iowa, 

New York, and West Virginia. While discussions in all these states were wideranging, they paid particular attention respectively to life insurance supervision, the 

property and casualty sector (including brokers), coordination with foreign regulators, 

and challenges faced by smaller states.

• The assessors also met with officials from the U.S. Department of the Treasury to 

discuss their overview of the system in the context of evolving plans for the reform of U.S. 

regulation in response to the financial and economic crisis.3

7. Findings from these discussions (and documents made available to the assessors) 

have been used to inform the overall assessment of observance of the ICPs in the 

United States. The well-developed procedures of the NAIC have made it possible to take a 

view, in particular for financial regulation, of the degree of uniformity, in extent and quality 

of regulation, across the states. Nonetheless, the assessors note that their conclusions are 

subject to unavoidable limitations on their ability to verify practices across the country 

(particularly in the implementation of regulatory requirements) that result from a state-based 

system with over 50 separate authorities. 

 

3

 In particular, the mission discussed the proposals set out in the document “Financial Regulatory Reform: A 

New Foundation,” U.S. Department of the Treasury, June 2009. 
 6 

C. Institutional and Market Structure—Overview 

8. The U.S. insurance market is the largest in the world. There were 7,948 licensed 

insurance companies at the end of 2008. Total premium volume in 2008 of US$1.24 trillion 

accounted for 29 percent of the global market (Japan and the United Kingdom were second 

and third largest with 11 percent and 10 percent shares respectively). On insurance density 

measures (premiums per capita), the United States ranked ninth at US$4,078 in 2008 and 

thirteenth on insurance penetration (premiums as a percentage of GDP) at 8.7 percent.4

 There 

are three main sectors—life, property and casualty (divided between personal and 

commercial lines), and health insurance. Key specialist insurance lines (i.e., those which 

must be written in separate companies) are: financial guaranty (bond insurance—the 

“monoline insurers”); mortgage insurance; and title insurance. The sector also includes 

captive insurance companies and Risk Retention Groups (RRGs). Total employment in 

insurance companies was 1.6 million at the end of 2008. 

9. Most U.S. insurers write primary insurance on U.S. risks. The U.S. market is 

characterized by:

• low market concentration in most sectors, indicating a high degree of competition, 

which has been supported by provisions allowing certain risks, mostly in commercial 

lines, that are hard to insure (“excess and surplus lines”) to be written free of some of 

the general regulatory requirements and coverage by guaranty funds, provided that 

cover has previously been sought by an agent but cannot be obtained in the regulated 

(“admitted”) market; 

• limited private sector capacity in certain “hard to insure” risks, particularly those 

related to severe weather, natural catastrophes, and some classes of medical risks, 

which has led to the creation of certain “residual market” mechanisms, such as joint 

underwriting arrangements and programs provided directly by state or federal 

government; at federal level, these cover, in particular, terrorism losses (TRIA), flood 

risk and crop loss; and, at state level, mainly workers compensation or property risks 

in areas exposed to natural catastrophes and reinsurance for hurricane losses (the 

Florida Hurricane Catastrophe Fund); 

• limited international insurance business (so most business written by U.S. insurers is 

in relation to U.S. risks) and a relatively small reinsurance capacity—58 percent of all 

premium ceded to reinsurers by U.S. insurers is to markets in Europe and Bermuda 

(85 percent, if premium ceded to offshore affiliates of U.S. companies is included); 

and

 

4

 All data from Swiss Re: World Insurance in 2008. 
 7 

• relatively few cross-sector groups offering insurance as well as other financial 

services: while the 1999 Gramm-Leach-Bliley Act (GLBA) reformed the regulatory 

framework to accommodate cross-sector groups, there are only 17 groups headed by a 

bank holding company regulated by the Federal Reserve (because they offer 

insurance and banking), while 42 contain a thrift regulated by the Office of Thrift 

Supervision.

10. Distribution of insurance products is mainly through agents and brokers. 

Intermediaries distributing insurance in the United States are generally referred to as 

“producers.” They may act as agents of one or more insurance companies (captive agents or 

independent agents) or as brokers—i.e., acting on behalf of the customer. Banks may also 

distribute insurance products but have limited market share. 

Recent performance 

11. Overall, the insurance sector, and the property and casualty companies in 

particular, has been resilient through the financial crisis. Capital and surplus, the key 

measure of the buffer available in case insurance company reserves prove inadequate to 

ensure that policyholder claims can be paid, has fallen by 6.7 percent in life and 8.5 percent 

in property and casualty between end-2007 and mid-2009. Companies whose capital 

adequacy, measured by the regulators’ risk-based capital (RBC) requirements, fell to 

regulatory intervention levels5

 accounted for only 3 percent of the total in 2008. While there 

have been several firms placed in receivership, only one company has been subject to 

receivership for causes and with a timing directly related to the financial crisis.6 The 

property and casualty sector suffered from investment market falls, but losses from natural 

catastrophes so far in 2009 have not been as high as in some recent years. As Table 1 shows, 

while absolute dollar amounts of capital have fallen, so has the required risk-based capital, 

leading to capital coverage ratios in the sectors falling more slowly. Actual capital in each of 

the sectors is many times greater than required RBC levels and, on average, about two to 

three times the capital levels at which regulatory intervention would occur.

12. However, there have also been significant stresses in the insurance sector in the 

last two years. Writers of financial guaranty business (the monoline insurers) lost the 

previously high ratings on which much of their business depended after serious losses on 

business related to impaired structured finance products. The American International Group 

(AIG) was supported by the federal authorities after major losses at its capital markets 

affiliate. Two other insurance groups with federally regulated banking or thrift subsidiaries 

were granted federal government capital support under the Troubled Asset Relief Program 

(TARP) (others had applied for funds). Insurers also benefited from Federal Reserve 

 

5

 The basis for calculating capital adequacy—Risk-Based Capital (RBC)—is described and assessed under 

ICP 23 in Table 4 (the detailed assessment) and the system of control levels (triggers for intervention) is 

described and assessed under ICP 14. 

6

 See the assessment of ICP 16 for an account of receivership and other enforcement powers. 
 8 

programs, particularly the Term Asset-Backed Securities Loan Facility (TALF) that 

supported liquidity in the markets in which they had invested. 

Table 1. United States: U.S. Insurance Companies—Capital Adequacy 

Year End 2008 2007 2006 2005 2004 

Life 

Total adjusted capital (US$ billions) 337.9 382.6 363.5 344.4 340.2

RBC requirement (US$ billions) 44.6 47.7 44.8 42.3 43.9

Industry aggregate RBC ratio (TAC as % of 

RBC) 758% 802% 811% 814% 775%

Median RBC ratio of insurers (TAC as % of 

RBC) 910% 1009% 996% 975% 940%

Number of companies in action levels 23 13 13 11 17

Percentage of companies in action levels 2.7% 1.5% 1.4% 1.1% 1.7%

Property and Casualty 

Total adjusted capital (US$ billions) 578.9 640.7 599.3 523.8 484.8

RBC requirement (US$ billions) 96.8 102.7 98.6 94.2 93.6

Industry aggregate RBC ratio (TAC as % of 

RBC) 598% 624% 608% 556% 518%

Median RBC ratio of insurers (TAC as % of 

RBC) 992% 977% 935% 877% 828%

Number of companies in action levels 79 71 75 86 108

Percentage of companies in action levels 3.0% 2.7% 2.9% 3.4% 4.3%

Health 

Total adjusted capital (US$ billions) 75.2 79.9 72.2 61.6 46.8

RBC requirement (US$ billions) 12.7 12.2 10.9 9.6 8.1

Industry aggregate RBC ratio (TAC as % of 

RBC) 592% 655% 662% 642% 578%

Median RBC ratio of insurers (TAC as % of 

RBC) 545% 589% 582% 574% 548%

13. Life insurance has been particularly affected. In addition to large unrealized 

investment losses, some companies experienced downward pressure on regulatory capital 

ratios that raised concerns over possible widespread ratings downgrades. Regulators were 

approached for relief and firms were granted some individual modification (“permitted 

practices”). The strains were related to recent strong growth in non-traditional savings 

products such as variable annuities (Box 1), many of which contain generous guarantees. 

Life insurers were also affected by the illiquidity in asset markets, including pressures in 

securities lending (cash collateral had been reinvested by some firms in illiquid instruments, 

causing liquidity strains when the collateral was recalled). New business volumes have been 

falling sharply. 
 9 

Box 1. Variable Annuities 

Variable annuities products are investment-linked products with some form(s) of guarantee 

(accumulation, income, death or withdrawal) which are sold by life insurers into the retirement and 

investment market. In the United States, the most common guarantee offered is that on withdrawal. The 

customer’s initial capital paid into such a product is invested in a sub-account at the customer’s discretion. 

The customer can withdraw guaranteed periodic amounts up to the amount of the initial capital. The product 

terminates once the initial capital has been withdrawn with any remaining funds in the sub-account returned 

to the customer at maturity. So the sub-account value fluctuates with movements in the underlying assets and 

decreases with withdrawals. 

The product therefore effectively combines an annuity, in the form of guaranteed periodic 

withdrawals, with a call option on the underlying residual sub-account at maturity. So, while the 

customer who owns the sub-account carries much of the investment risk, the insurer is carrying the risk that 

the sub-account will not be adequate to fund the guaranteed withdrawal amounts. 

The NAIC has been developing its approach to the treatment of such products with complex 

guarantees in its capital adequacy requirements. In 2000, an internal models based approach was added to 

the previously factor-based capital approach to capture interest rate risk. This was refined in 2005 to capture 

equity risk. 

These changes have automatically been applied by all states, as the NAIC risk-based capital system is 

referenced in all state laws. Work is currently under way further to refine the reserving requirements for 

such products. Over the last few years, and especially since the financial crisis, insurers have reduced their 

writing of such products and scaled back the types and levels of guarantees offered.

14. While pressures have eased, there remain challenges. The recovery in many 

markets since March 2009 has brought relief to the insurance sector. However, risks remain. 

• Life companies in particular remain significantly exposed to possible further 

problems if economic downturn continues. Their commercial property exposure is 

high, both in loans and investments, as is exposure to banks. A prolonged low interest 

rate environment would exacerbate strains. However, as life companies have shifted 

to savings products, their insurance risks (mortality and longevity) have become less 

significant.

• Health insurers are subject to significant uncertainty arising from the proposed federal 

government reforms to health insurance. 

• Property and casualty risks are more dispersed. While the United States is exposed to 

major natural catastrophes, their impact is regional; and while some companies are 

heavily exposed to particular events, national companies have diversified risks and 

the largest catastrophe risks are carried by reinsurers outside the United States.

Regulatory arrangements 

15. Insurance is a predominantly state-regulated activity in the United States. While 

the foundation for state responsibility goes back to 1851, a key event was the legislative 

reaction to a Supreme Court decision in 1944. The court declared that insurance was 

interstate commerce and, hence, under the U.S. constitution, subject to federal regulation, 
 10 

16. There are also some federal government responsibilities. While state regulation 

has not been substantially challenged since 1945, the federal government has enacted various 

measures affecting insurance. The 1974 Employee Retirement Income Security Act (ERISA) 

imposed federal reporting requirements and enforcement powers for employer-sponsored 

retirement plans and other related benefits. The Gramm-Leach-Bliley Act of 1999 preserved 

state regulation by reaffirming the McCarran-Ferguson Act, but pressed the states to achieve 

licensing reciprocity in insurance intermediary licensing or accede to federal intervention. 

The 2002 U.S.A. PATRIOT Act extended aspects of the Federal Bank Secrecy Act to 

insurance and gave examination powers in relation to anti-money laundering and certain 

specified insurance business to federal authorities.

17. States carry out insurance regulatory functions within the state administration.

The insurance departments or similar units within state administrations carry out licensing 

and oversight work for insurance companies and intermediaries under powers set out in state 

legislation and in accordance with state budgets. A commissioner heads the department and 

exercises all formal powers. Some commissioners are elected, but most are appointed by the 

state governor. While arrangements vary among states, funding is usually raised from the 

insurance markets via fees and levies. (Fees are usually for specific activities, such as 

licensing and examinations, and are generally paid directly to the insurance department. 

Levies usually form part of state government revenue and are either dedicated to funding the 

insurance department or flow to general revenue with insurance department budgets subject 

to normal state budgeting processes). Insurance departments also collect premium taxes for 

the states, a significant part of state governments’ total revenues. 

18. Businesses must obtain a license in each state where they are writing risks. An 

insurance company is said to be “domiciled” in the state that issued its primary license; it is 

“domestic” in that state. Once licensed in one state, it may seek licenses in other states as a 

“foreign” insurer. An insurer incorporated in a foreign country is called an “alien” insurer in 

the U.S. states in which it is licensed. “Multistate companies” (the vast majority by premium 

income) are those that write business in more than one state. The extent of mutual 

recognition (known as reciprocity) varies by state and requirement, but financial regulation is 

mostly carried out by the state where the insurer is domiciled. 

19. State insurance departments carry out both financial and market conduct 

regulation. States set reserving and capital requirements—the rules and associated reporting 

frameworks are complex and details are set out in an appendix to this assessment. States 

carry out financial analysis and onsite examinations—which are required by law every 

five years at minimum (or three years in some states). Most states have some review or 

approval authority over policy forms and, in the case of property and casualty insurers, they 

also often regulate premium rates. In respect to rates, the objective is to ensure that they are 
 11 

not inadequate, excessive, or unfairly discriminatory. Departments also respond directly to 

consumers’ complaints and requests for information. They license and oversee insurance 

intermediaries. States have extensive powers to enforce their financial and market conduct 

requirements. 

20. The NAIC plays an important coordinating role for state regulators. The NAIC 

is the vehicle through which the state insurance commissioners act as a group. The 

commissioners have established a not-for-profit organization to assist them in respect of their 

regulatory responsibilities, by centralizing some functions to achieve economies and greater 

uniformity, to pool resources and to obtain and share expertise. The objective is to enable the 

states to develop regulation in ways they could not achieve by acting individually. The NAIC 

itself employs some 430 staff, which compares with nearly 12,000 employed by the states. 

Key functions of the NAIC, in relation to this assessment, are:

• processes and procedures to develop and agree model laws and regulations, which 

now total over 200. States contribute to the development of these laws via NAIC 

working groups. While states are not obliged to implement model laws and 

regulations in state law, the process creates an expectation that state legislation will 

broadly mirror the requirements agreed by commissioners at NAIC meetings. In 

practice, states often implement the models with variations, which are particularly 

significant in market conduct and producer licensing; 

• the Financial Regulation Standards and Accreditation Program (referred to in this 

report as “the accreditation program”). This is an extensive process aimed at ensuring 

that states meet certain minimum standards in respect to financial regulation. It 

covers, in relation to financial issues, laws and regulations (including 18 of the NAIC 

model laws) and key provisions on accounting and solvency; regulatory practices, 

including offsite and onsite supervision; and organizational and staffing practices. 

Standards on insurance company licensing will be added in 2012. In order to achieve 

and retain accreditation, states undergo a detailed review by independent examiners 

(many are accountants or retired senior regulators) once every five years; interim 

annual reviews are also required. Final decisions on accreditation are taken by a 

committee of commissioners. All 50 states and the District of Columbia are 

accredited. Formally, the effect of accreditation is to enable states to accept 

examinations undertaken by the domestic state rather than carrying out their own, 

although individual states may still impose additional standards on “foreign” 

companies (i.e., accreditation does not guarantee reciprocity). There are also 

reputational implications; and 

• the centralized process of financial analysis operated through the mechanism of the 

NAIC’s Financial Analysis Working Group (FAWG). This is a group of 18 senior 

financial experts who meet to discuss reports from NAIC staff covering all 

“nationally significant companies” (around 1,600 companies representing 85 percent 

of the market) based on annual and quarterly statements and other information. The 
 12 

objective is to challenge domestic state regulators, who retain responsibility for any 

action, on their analysis of companies and their regulatory response. A similar process 

is being developed for market conduct regulation. 

State regulators, through the NAIC, maintain a number of databases covering financial 

information (most companies submit statements direct to the NAIC), data on producers, etc. 

21. As they are the most likely to be fully and effectively implemented by states, this 

assessment highlights measures subject to accreditation program. The assessors have 

relied heavily on the accreditation program, because it is widely seen as assuring that 

minimum standards are met in all accredited states. In assessing statewide compliance with 

other NAIC model laws and other measures, the assessment distinguishes between those 

implemented in most, many and some states. However, as mentioned above, states have not 

been assessed individually and there is therefore a degree of uncertainty about the assessment 

of compliance across the country in these cases. 

22. State regulators, through NAIC coordination mechanisms, have been taking 

initiatives to modernize key aspects of their approach, although progress has been 

mixed. In addition to continuing development of their requirements, state regulators have 

been engaged since 2000 on a broad-based regulatory modernization plan. This includes 

shifting from predominantly compliance/audit examinations of insurers to more forwardlooking assessments of risk. This important change will be formally part of the accreditation 

program from January 1, 2010. Many of the objectives of the wider modernization plan have 

been met, but others, such as those relating to greater uniformity in producer licensing, have 

not been fully met. 

23. The mixed progress reflects structural features of the regulatory framework: 

• In a state-based system, state administrations and legislatures are not bound to 

implement NAIC model laws and regulations; while local variations are often 

appropriate given the varying market conditions, it can be hard to achieve uniformity 

where it is necessary or desirable (in particular to reflect the essentially national reach 

of many large insurance companies and some intermediaries). 

• While the NAIC processes appear to be thorough and to deliver appropriate change, 

the need to involve many stakeholders and achieve consensus significantly slows the 

delivery of change, except where it is particularly urgent. 

• Regulatory requirements are heavily rules-based, which, while it has advantages in 

making requirements clear and comprehensive, increases the time required to make 

regulatory changes; the heavy use of rules also risks creating a tendency for 

regulators to engage in micro-management of insurers as each issue or problem that 

arises is addressed by adding even more rules. 

24. A major new review, the Solvency Modernization Initiative (SMI), is now under 

way. In 2008, the NAIC launched the SMI as a review of financial requirements. This will 

include a study of solvency regimes and developments in other countries and the EU. The 
 13 

aim is to deliver a framework consistent with best practices and, if possible, more closely 

aligned with regimes in other countries and with accounting standards. The SMI is wideranging, covering: 

• capital requirements, including reviewing the design and calibration of current 

requirements and considering whether to require regulatory reporting of companies’ 

economic capital levels and information about the development of the companies’ 

target capital; 

• international accounting, particularly the implications of the joint project on insurance 

contract accounting of the U.S. Financial Accounting Standards Board (FASB) and 

International Accounting Standards Board (IASB); insurance regulators are required 

to review all changes to GAAP accounting and to determine what changes should be 

made to their own system of statutory accounting; 

• insurance valuation, including a project to move toward more principles-based 

reserving in life insurance; and consideration of making capital requirements reflect 

individual company risk characteristics more; 

• reinsurance—implementing a modernization framework developed in 2008, once 

pending federal legislation is in place; a new Reinsurance Supervision Review 

Department will be charged with assessing non-U.S. regulatory regimes under a 

mutual recognition framework; and 

• group solvency issues—considering potential revisions to the current approach to 

supervision of groups, the use and potential improvement of supervisory colleges 

with regulators from around the world, and group-wide supervision requirements, 

which may include group-wide capital requirements. 

Consideration will also be given to the development of corporate governance principles for 

insurance companies and the establishment of risk management requirements. These are all 

major initiatives that have the potential to transform U.S. insurance regulation in the future. 

25. Other reforms will address issues highlighted by the financial crisis, and 

insurance will be included in the scope of future system wide regulatory reforms.

Reforms are pending to the requirements applying to bond insurers (monolines) and to 

securities lending, to take account of crisis events. Action has already been taken and more is 

under consideration to reduce the former reliance on ratings of the major credit rating 

agencies. Congress and the administration are working on regulatory reform in response to 

the crisis and proposals to date include certain reforms affecting insurance regulation. The 

details of these wider reforms were under discussion at the time of this assessment. 

Guaranty funds (policyholder compensation arrangements) 

26. Insurance policyholders are protected against the insolvency of insurance 

companies by guaranty associations in each state. All U.S. insurance companies are 

required to be members of associations covering life and health insurance and, through 
 14 

separate organizations, property and casualty. These associations are established by state 

laws (there are NAIC models). Payments are triggered by the insolvency of an insurer, 

although, in practice, associations seek to obtain continuity of coverage by transferring 

policies to other companies. Laws differ on the extent of coverage and maximum amount 

payable per policyholder. Associations rely on assessments of other insurers writing the same 

class of business, i.e., they are not pre-funded. State laws set limits on assessment—typically, 

for life insurance, 2 percent of each insurer’s prior year premium income in the state per year. 

D. Main Findings 

27. Insurance regulation in the United States is generally thorough and effective, 

although there are areas where development is needed. Strong regulation contributed to 

the overall resilience of the insurance sector during the financial crisis. Insurance regulators 

are responding to lessons from the crisis. In relation to compliance with the Insurance Core 

Principles: 

• The preconditions for effective insurance supervision are generally met—reflecting 

the highly developed legal and institutional framework within which it operates and 

the scale and liquidity of U.S. financial markets; but there is a need for development 

of the policy framework in relation to insurance and financial stability and 

international issues. 

• There is a need for institutional reform in the laws governing state insurance 

departments, including on appointment and dismissal of commissioners, the 

budgetary framework and remuneration policies, in order to secure the independence 

of regulatory work. 

• While insurance regulation is carried out openly and transparently, there is a need for 

measures (including providing free access to more information and documents about 

the NAIC’s model laws and their implementation) to foster improved stakeholder 

understanding of the state-based regulatory approach. 

• There is a comprehensive set of requirements and processes for insurance company 

licensing, but some gaps in the requirements relating to suitability of persons with 

reliance on supervisory work to identify concerns and take action where necessary.

• Requirements in relation to governance, internal controls, and risk management are 

limited and should be extended, but departments are focusing closely on these issues 

in the risk-focused examination process currently being rolled out. 

• NAIC data collection and analysis capabilities are world-leading, although the 

absence of complete group-wide consolidated data for insurance groups and broader 

financial conglomerate groups hinders the ability of supervisors to analyse and 

monitor market-wide events of importance for the stability of insurance markets.

• Financial examinations (i.e., onsite supervision) are generally thorough and well 

documented. Examinations also appear to identify the important issues. The rollout of 
 15 

a risk-focused examination approach is requiring major changes from examiners and 

implementation needs to be closely monitored by the NAIC. 

• The approach in relation to enforcement is comprehensive and applied by regulators 

in practice as necessary; there is no explicit authority for supervisors to fine 

individual directors or senior managers of insurers, or to bar them from acting in 

responsible capacities in the future.

• The approach to supervision of groups needs significant development. The U.S. 

supervisors do not currently make a comprehensive and consistent assessment of the 

financial condition of the whole group of which a licensed insurance company is a 

member. Risk-focused examinations are not yet generally focusing on group issues; 

and supervisory colleges are not meeting for all U.S.-based international groups.

• The liability reserving methods and bases generally lead to conservative estimates 

and, in combination with capital requirements, provide a sizable buffer against 

adverse experience. However, for general transparency and for international 

comparison, consideration should be given to specifying a target safety level for 

reserving and an associated target safety level for capital.

• While producer (i.e., intermediary) regulation is less uniform than it is for insurance 

companies, states have in place the core requirements—licensing, examinations and 

powers to take action in case of producer misconduct. There is a need to extend 

broker trust fund arrangements across states, to develop a uniform approach to the 

regulation of major brokers and to complete the current work on a consistent 

approach to the regulation of commission disclosure. 

• Consumer protection work is moving to a more proactive approach to market conduct 

of insurers. This transition has further to go, particularly in respect of the ability of 

departments to identify and respond quickly to wider market issues. As with producer 

licensing, there is a lack of uniformity across states in the market conduct area. 

However, core consumer protection requirements are apparently in place in most 

states. 

• Requirements on fraud, including making insurance fraud a crime, are in place across 

states, and the capacity of departments to address fraud-related issues is increasing as 

market conduct exams are undertaken and the availability of fraud data increases.

• The authorities have only recently brought relevant insurance business within the 

scope of federal anti-money laundering regulatory requirements. There were 

significant gaps in the framework when the most recent FATF work was undertaken 

in 2006. The need to increase resources available for examinations and the 

effectiveness of cooperation between state and federal regulators, are being addressed 

through discussions on new procedures and information sharing arrangements. 
 16 

Table 2. Summary of Observance of the Insurance Core Principles 

Insurance Core 

Principle Grading Comments 

ICP 1– Conditions for 

effective insurance 

supervision 

LO The preconditions for effective insurance supervision are generally met—

reflecting the highly developed legal and institutional framework within 

which it operates and the scale and liquidity of U.S. financial markets. But 

there is a need for some development of the policy framework in relation to 

insurance and financial stability and to international issues. Whereas 

insurance regulation is state-based, the broader regulatory and financial 

sector policy framework falls to federal authorities. On international 

insurance regulatory issues, there is a mismatch between the authority 

reserved to the federal government to enter into international agreements 

and that of the states to regulate the insurance sector, taking account of 

such agreements. 

ICP 2 – Supervisory 

objectives 

LO The objectives of departments are generally not established explicitly by 

law. They reflect the evolution of their roles and responsibilities over the 

years, the risks and challenges in insurance business in different states and 

the political preferences of state legislatures. There are differences in the 

ways individual departments view their objectives, which may hamper 

moves toward greater uniformity of state regulation. There is also some 

scope for conflict of objectives. There is a need to balance objectives of 

achieving financial safety and soundness and consumer protection with the 

desirability of fostering market efficiency and competitiveness. 

ICP 3 – Supervisory 

authority 

PO The vesting of regulatory powers in the commissioner in principle ensures 

that departments are operationally independent. However, the ability of the 

governor in most states to dismiss commissioners at any time, and without 

a public statement of reasons, exposes departments to potential political 

influences. Elected commissioners may be subject to the pressures of the 

electoral cycle. In addition, departments are dependent on state legislatures 

in respect of principal legislation and for budgetary resources, which 

cannot always be allocated according to the departments’ own priorities. 

Departments are exposed to budgetary cuts during economic downtowns, 

when workloads tend to rise (although income from examination work 

charged to companies can mitigate such pressures). The use of statewide 

remuneration policies constrain departments’ ability to hire specialist skills 

and can result in extensive and (for companies being examined) costly 

reliance on external experts. 

ICP 4 – Supervisory 

process 

LO Insurance regulation is carried out openly and transparently, with clear 

accountability to the state administration and legislature and rights of 

appeal (and judicial review), which balance the need for due process with 

the importance of regulators being able to act swiftly and decisively where 

necessary to achieve regulatory objectives. But there is a need for measures 

(including providing free access to more information and documents about 

the NAIC’s model laws and their implementation) to foster improved 

stakeholder understanding of the state-based regulatory approach. 

ICP 5 – Supervisory 

cooperation and 

information sharing 

LO Although the main focus of information exchange with other regulators has 

traditionally been on cooperation with other insurance departments, 

regulators are able to share information with relevant federal authorities 

and with regulators abroad. There is a need to continue developing the 
 17 

network of MoUs. All state insurance departments should ensure laws are 

updated to enable them to protect information received from foreign 

regulators. 

ICP 6 – Licensing O While approaches in individual departments vary, the core requirements 

adopted by all states represent a comprehensive set of requirements and 

processes for insurance company licensing. The extension of the 

accreditation process to licensing standards in 2012 should nonetheless 

provide assurance that the core licensing requirements continue to be 

complied with in practice by state departments. 

ICP 7 – Suitability of 

persons 

LO Departments take a view on all significant owners, Board members, senior 

management, auditors, and actuaries and take appropriate action where 

concerns arise. However, the approach is based on assessment of the fitness 

and propriety of key functionaries at the point of application for a license, 

and on an ongoing basis through the examination process, rather than the 

approval of individuals (which is the approach taken in some other 

countries). There are gaps in the specific requirements—companies do not 

have to notify departments of concerns about the fitness and propriety of 

key individuals and departments cannot disallow functionaries from 

holding two positions that could result in material conflict. 

 

ICP 8 – Changes in 

control and portfolio 

transfers 

O There are extensive requirements and related reporting governing changes 

in control and portfolio transfers. 

ICP 9 – Corporate 

governance 

LO Corporate governance standards for publicly-traded U.S. companies, 

including insurers, are set and enforced by the SEC, while requirements for 

all insurance companies will be introduced from January 2010. 

Departments have been increasing their focus on governance issues, mainly 

as a more risk-based approach to examinations has started to be 

implemented. Examinations had previously focused more on financial 

condition and related controls, while corporate governance has historically 

received less attention. The new examination approach is still being rolled 

out but the risk-based approach becomes part of the accreditation standards 

in 2010. 

ICP 10 – Internal 

controls 

LO Other than controls relating to financial reporting, departments have few 

requirements relating to internal controls on insurers at present. For 

publicly-traded companies, the Sarbanes-Oxley provisions provide a 

general framework of detailed control requirements and testing of controls. 

From January 1, 2010, much of this framework will be extended to all 

insurers, with the exception of smaller companies, but these requirements 

will take time to implement in full. Departments are increasingly looking to 

ensure sound internal controls at insurers via the risk-based examination 

process, but this approach is still being implemented. 

ICP 11 – Market 

analysis 

LO The absence of complete group-wide consolidated data for insurance 

groups and broader financial conglomerates hinders the ability of 

supervisors to analyze and monitor market-wide events of importance for 

the stability of insurance markets. The lack of analysis of developments 

outside the U.S. markets, given that it relies so heavily on offshore 

reinsurers, needs to be addressed. Otherwise, the NAIC data sources and 

analysis capabilities are world-leading. They should be more used in 

international supervisory college discussions to better understand U.S. 

insurer exposures in a group and to encourage insurance regulators in other 
 18 

jurisdictions to develop similar capabilities. 

ICP 12 – Reporting to 

supervisors and offsite monitoring 

LO The NAIC data collection and analysis capabilities in relation to authorized 

insurance companies are world-leading. The affiliate transaction 

requirements provide a strong means of identifying and controlling intragroup dealings and exposures. However, there are no formal reporting 

requirements for complete group-wide consolidated data for insurance 

groups and broader financial conglomerate groups which would allow 

insurance regulatory style financial condition assessment. 

ICP 13 – On-site 

inspection 

O Financial examinations are generally thorough and well documented. 

Examinations also appear to identify the important issues. The rollout of a 

risk-focused examination approach will require examiners to make more 

qualitative judgments about insurer risks and controls, including scoring 

them for inclusion in the risk matrix. Effective implementation will not be 

easy because of the changes it demands of examiners. The NAIC might 

consider undertaking an assessment of the implementation of the riskfocused examination approach in the near future (e.g., in the course of 

2012). 

ICP 14 – Preventive 

and corrective 

measures 

O The structure of prompt corrective action triggers and required actions is 

thorough and is rigorously applied. While it could not, and should not, 

prevent insurers ever failing, it does lead to reduced insurer shortfalls 

in any failure (guaranty fund data suggests most shortfalls are in the 

5–15 percent of liabilities range). It also provides clear messages to the 

insurers of the consequences of their reducing capital levels. 

ICP 15 – Enforcement 

or sanctions 

LO There is no clear authority for the supervisory authority to fine individual 

directors or senior managers of insurers or to bar them from acting in 

responsible capacities in the future. 

ICP 16 – Winding-up 

or exit from the 

market 

O There is a strong focus by the supervisory authorities on ensuring 

individual policyholder obligations are met. Customer complaints handling 

facilities in supervisory authorities, readily available information on the 

progress of insurer receiverships and a network of insurer guaranty funds 

provide a high level of policyholder protection. The arrangements for 

insurer wind-up and exit from the market are clear, have worked effectively 

and in conjunction with guaranty fund arrangements provide strong 

protection against policyholder loss if an insurer fails. 

ICP 17 – Group-wide 

supervision 

PO The U.S. approach is focused on securing the financial soundness of 

individual insurance companies. While this has not been unusual among 

insurance regulators internationally, many have been supplementing their 

strong solo company focus with financial and other requirements and more 

supervisory focus applied at group level and U.S. supervisors should do the 

same. They do not currently make an assessment of the financial condition 

of the whole group of which a licensed insurance company is a member. 

Risk-focused examinations are not yet generally focusing on group issues; 

and supervisory colleges are not meeting for all U.S.-based international 

groups. 

ICP 18 – Risk 

assessment and 

management 

LO While the desired outcomes for this ICP are essentially achieved in practice 

owing to comprehensive examination of insurers, it is increasingly 

important that the risk management function of insurers is of high quality 
 19 

and given significant focus and influence within insurers. There is no 

requirement that an insurer have in place comprehensive risk management 

policies and systems capable of promptly identifying, measuring, assessing, 

reporting, and controlling their risks. 

ICP 19 – Insurance 

activity 

LO The relevant laws or regulations do not explicitly provide that an insurer 

must have in place strategic underwriting and pricing policies approved and 

reviewed regularly by the Board. Boards are not required to set the strategic 

limits on these core insurance functions within which management should 

operate. There is a risk that the prior notification requirement may lead to 

undue ‘prior approving’ of many reinsurance transactions, which could be 

an ineffective use of supervisory resources. 

ICP 20 – Liabilities O The liability reserving methods and bases generally lead to conservative 

estimates, which is in line with the conservative, book value nature of 

statutory insurance accounting in the United States Elements of the 

reserving methods adopted involve stochastic modeling or scenario analysis 

techniques to estimate the reserves required under moderate adverse 

conditions. However, there is currently no particular or specified safety 

level which is targeted for reserving – or capital. For general transparency 

and for international comparison, it is recommended that consideration be 

given to specifying a target safety level for reserving and an associated 

target safety level for capital. This should also assist in keeping margins for 

conservatism in reserves more similar across insurance classes and assist 

with peer comparisons of reserving. 

ICP 21 – Investments O The regulatory requirements for investments are robust and likely to have 

contributed to the limited number of major investment problems for 

insurers in the financial crisis. As insurers move to a more principles-based 

approach, it will be important to ensure that all aspects of investment risk, 

especially asset/liability mismatching risks, are well covered in the 

reserving and capital requirements. 

ICP 22 – Derivatives 

and similar 

commitments 

O The requirements relating to derivatives use in insurers are robust and 

sensible in that they allow derivatives to be used for purposes which would 

enhance an insurer’s investment management and returns without exposing 

it to undue risk of losses. There are no requirements on derivatives use at a 

holding company level outside the licensed insurer (but this is not required 

by the ICPs). 

ICP 23 – Capital 

adequacy and 

solvency 

LO There are no requirements to address inflation of capital through multiple 

gearing (i.e., holding company debt raisings injected as equity into 

insurance subsidiaries). These should be included in the law, regulation or 

rules. 

Insurance company reserves are determined conservatively and the 

regulatory capital is then required in addition. The combination of 

reserving and capital provides a sizable buffer against adverse experience. 

In the absence of a specified safety level which is targeted for reserving 

plus capital, it is difficult to determine the level of adversity that the 

combination of reserves and capital can cover, but it appears to be 

commensurate with or higher than in many other insurance jurisdictions. 

ICP 24 – 

Intermediaries 

LO While producer (i.e., intermediary) regulation is much less uniform than it 

is for insurance companies, most states have at least the core requirements 
 20 

– licensing, requirements in relation to producer skills and expertise, and 

powers to undertake examinations and to take action in case of producer 

misconduct. The general legal framework provides safeguards for client 

money where intermediaries act as agents (and this has been tested in 

numerous cases). There is less uniformity on the safeguards applying to 

money held by brokers, but separate accounts with trust status are required 

in at least two states where large commercial lines brokers are domiciled. 

ICP 25 – Consumer 

protection 

O Departments have been increasing the scope of their consumer protection 

work in recent years, moving away from a traditional focus on financial 

issues (and handling of consumer complaints) to a more proactive approach 

to market conduct of insurers. Established regulatory tools from the 

financial area, and the model of cooperation and challenge between state 

insurance departments, have been extended to market conduct. This 

transition has further to go, however, particularly in respect of the ability of 

the departments to identify and respond quickly to wider market issues as 

well as problems at individual companies. As with producer licensing, there 

is a marked lack of uniformity across states in the market conduct area. 

However, core consumer protection requirements are apparently in place in 

most states. 

ICP 26 – Information, 

disclosure and 

transparency toward 

markets 

O While there are no regulatory requirements in relation to disclosure, full 

financial information, including the actuarial opinion and auditor’s 

statement, are readily available to stakeholders. This reflects the relative 

ease of access and concentration of data that has resulted from financial 

statements being submitted directly to the NAIC. However, there is scope 

to improve the availability of information to policyholders without access 

to databases, ratings, etc, while the NAIC should also consider reviewing 

the benefits of developing a set of explicit disclosure requirements. 

ICP 27 – Fraud O While approaches vary by state, core requirements (such as making 

insurance fraud a crime) are in place across states. The capacity of 

departments to address fraud-related issues is increasing as market conduct 

exams are undertaken and the availability of data on fraud improves with 

the development of databases. Remaining gaps in the framework—for 

example, where departments do not require an anti-fraud plan from 

insurance companies—should be addressed as soon as possible. 

ICP 28 – Anti-moneylaundering, combating 

the financing of 

terrorism 

PO The authorities have only recently brought relevant insurance business 

within the scope of anti-money laundering regulatory requirements. 

Implementing the approach has taken time. There were significant gaps in 

the framework when the most recent FATF work was undertaken in 2006. 

The Internal Revenue Service (IRS), as the examination authority in this 

area, is now carrying out examinations. As its resources available for this 

work are limited, it is cooperating with state insurance departments to make 

use of their expertise. However, the effectiveness of cooperation between 

state and federal regulators is limited pending the consideration of legal 

issues arising from their collaboration and agreement of new procedures 

and information sharing arrangements. Both the federal government and 

state insurance departments wish to increase information sharing of 

examination information. This work has been given a high priority by the 

federal and state agencies but no deadline as yet. 

(A factual update on developments since the 2006 FATF work is being 

undertaken separately as part of the FSAP work.) 

Aggregate: Observed (O) – 11, largely observed (LO) – 14, partly observed (PO) – 3, not observed (NO) –zero, 

not applicable (N/A) – zero. 
 21 

 

E. Recommended Action Plan and Authorities’ Response 

Recommended action plan 

Table 3. Recommended Action Plan to Improve Observance of the Insurance 

Core Principles

Principle Recommended Action 

ICP 1 – Conditions for 

effective insurance 

supervision 

The authorities should (i) increase information-sharing and coordination 

between state regulators and federal authorities, including representation of 

state regulators in national bodies with responsibilities for system wide 

oversight and financial stability; (ii) agree policies and procedures for the 

regulation of systemically important institutions, markets and instruments, 

where assessed to exist in the insurance sector; and (iii) make new 

arrangements to increase the authority of federal authorities in relation to the 

implementation of international agreements. 

ICP 2 – Supervisory 

objectives 

Insurance departments, the NAIC and state legislatures should develop a clear, 

joint statement of the objectives of insurance regulation, taking into account 

good practice internationally, and align the objectives of individual state 

departments with these objectives. This work should address whether there are 

potential conflicts between existing objectives and how to manage them and 

the need to balance the objectives of achieving financial safety and soundness 

and consumer protection with the desirability of fostering market efficiency 

and competitiveness. 

ICP 3 – Supervisory authority The NAIC and state legislatures should make reforms including (i) providing 

for fixed terms to be standard for commissioner appointments, with dismissal 

mid-term to be possible only for prescribed causes and with publication of 

reasons; (ii) making departments fully self-funding, subject to continued 

accountability to and oversight by state legislatures, while allowing them 

greater flexibility to hire staff with specialist skills and reduce reliance on 

external experts; and (iii) extending the rule-making powers of departments to 

a wider range of technical issues (for example valuation and risk-based 

capital), and subject to appropriate consultation and requirements for due 

process. 

State laws should be changed, where this has not already been done, to extend 

the protection of information received from other government agencies to 

foreign agencies, which is essential to support the widest scope of informationsharing internationally. 

The NAIC and state legislatures should consider extending the protection of 

confidentiality, to the extent consistent with the wider legal environment, to all 

relevant information which is received by departments, rather than limiting 

protection according to the source of the information, as at present. 
 22 

Principle Recommended Action 

ICP 4 – Supervisory process To further improve the transparency of its work, the NAIC should: (i) make 

publicly available some information that is currently available only on payment 

of a fee or by subscription (for example the NAIC model laws and material on 

how states have adopted them); (ii) publish summary information on their 

assessment of states’ compliance with accreditation standards (even if scores 

remain private); and (iii) commit to publication on a regular basis (maybe 

every two years) of their self-assessment of compliance with IAIS Insurance 

Core Principles. These measures would help to foster improved understanding 

of state regulation and the role of the NAIC. In addition, the NAIC could also 

consider developing its approach to regulatory impact analysis and making 

such work a routine part of its analysis of proposed new or changed 

requirements. 

ICP 5 – Supervisory 

cooperation and information 

sharing 

The states and NAIC should continue to develop the network of MoUs. As 

mentioned in connection with ICP3, all state insurance departments should 

ensure that laws are updated to enable them to protect information received 

from foreign regulators. This will ensure that overseas regulators are not 

deterred from sharing information freely. 

ICP 7 – Suitability of persons Specific requirements in relation to individuals’ fitness and propriety should be 

adopted. Gaps in the requirements of departments should be filled—companies 

should have to notify the department of concerns about the fitness and 

propriety of key individuals and departments should be able to disallow 

functionaries from holding two positions that could result in material conflict. 

 

ICP 9 – Corporate Governance As examiners gain experience, the NAIC and/or departments should consider 

issuing more guidance on good and bad practices in corporate governance for 

insurers. This would help examiners and firms to develop a clearer expectation 

of what constitutes effective governance for insurance business, including for 

groups. 

ICP 10 – Internal controls As examiners gain experience, the NAIC and/or departments should consider 

the scope for issuing guidance on good and bad practices in internal control. 

They should also make it a formal requirement for insurers to have an internal 

audit function. Such a function is now widely considered as an important part 

of a good control framework—similarly to audit committees, where there are 

now extensive requirements of all but the smaller insurers. 

ICP 11 – Market analysis Regulators should collect more complete group-wide consolidated data for 

insurance groups and broader financial conglomerates. They should develop 

further their analysis of developments outside the U.S. markets. 

ICP 12 – Reporting to 

supervisors and off-site 

monitoring 

Collection of group-wide consolidated data for insurance groups and broader 

financial conglomerate groups should be introduced. 

ICP 15 – Enforcement or 

sanctions 

The insurance laws should be changed to provide the supervisory authority 

with powers to fine individual directors and senior managers of insurers, and to 

bar them from acting in responsible capacities in the future. 
 23 

Principle Recommended Action 

ICP 17 – Group-wide 

supervision 

U.S. supervisors should (i) include fuller assessment of the financial condition 

of the whole group of which a licensed insurance company is a member; this 

may involve quantitative techniques and practices in use internationally; 

(ii) extend the risk-focused approach to examinations of solo insurance 

companies to groups, again starting with U.S. groups—in effect extending the 

lead regulator and college of regulators arrangements already in widespread 

use for such groups within the framework developed by the NAIC; (iii) ensure 

that colleges of supervisors for the U.S. groups with major international 

operations are established and functioning effectively—and led by U.S. 

regulators with appropriate insurance expertise. 

It may also be desirable for insurance regulators to be given additional powers, 

such as clear authority to license insurance holding companies, apply insurance 

capital requirements to the consolidated insurance group and direct the 

insurance holding company to make changes at the group level to rectify any 

shortcomings. 

ICP 18 – Risk assessment and 

management 

The relevant laws, regulations or standards should be changed to include a 

requirement that an insurer have in place comprehensive risk management 

policies and systems capable of promptly identifying, measuring, assessing, 

reporting and controlling their risks. 

ICP 19 – Insurance activity The relevant laws or regulation should explicitly provide that an insurer must 

have in place strategic underwriting and pricing policies approved and 

reviewed regularly by the Board. 

ICP 23 – Capital adequacy and 

solvency 

For general transparency and for comparison, it is recommended that 

consideration be given to specifying a target safety level for reserving and an 

associated target safety level for capital. This should assist not only with peer 

comparisons of reserving and capital across insurers, but also comparisons 

against other insurance regimes internationally. Requirements to address 

inflation of capital through multiple gearing (i.e., holding company debt 

raisings injected as equity into insurance subsidiaries) should be included in the 

law, regulation or rules. Further development of stress testing could be 

considered, using the experience gained from exercises undertaken during the 

financial crisis. 

ICP 24 – Intermediaries Some strengthening of the approach to producer regulation is recommended: 

(i) to extend broker trust fund arrangements across states (where not already in 

place) to ensure that client funds are fully protected; (ii) to develop a uniform 

approach to the regulation of major brokers which reflects the important role 

which large brokers play in the commercial lines market; and (iii) to complete 

the current work on a consistent approach to the regulation of commission 

disclosure. In addition, producers should be required to make disclosures to 

customers of the status under which they are doing business, including which 

insurance companies have appointed them. 

ICP 28 - Anti-moneylaundering, combating the 

financing of terrorism 

It is recommended that a timetable is set for the agreement and implementation 

of new arrangements between state insurance departments and federal 

authorities that will deliver greater resourcing of supervisory activities as well 

as necessary information exchange. 
 24 

Authorities’ Response to the Assessment 

28. The U.S. authorities welcome the opportunity to take part in the U.S. FSAP and the 

IMF’s assessment of a high level of observance of the IAIS Insurance Core Principles (ICPs). 

It has provided insurance regulators in the United States with a timely opportunity to 

undertake a comprehensive self-assessment of the U.S. insurance regulatory system against 

international standards, and has contributed to ongoing internal reviews and assessments of 

regulatory practices. In addition, the FSAP has served as a useful platform for providing an 

overview of the U.S. insurance regulatory system and its multi-jurisdictional structure. The 

authorities appreciate the recognition by the IMF of the strengths in the regulatory system 

including areas that the IMF itself has coined as “world leading.” 

29. As recognized by the Report, it is important to consider the U.S. assessment in 

context. The assessment of the U.S. supervisory framework was undertaken in the wake of a 

severe financial crisis, and movements toward significant changes in supervisory practices 

have gained momentum as a result of the financial crisis and circumstances emanating from 

the crisis, including with respect to group-wide supervision. The IMF’s assessment of U.S. 

compliance with ICP 17, the group-wide supervision standard, goes beyond the scope of the 

current ICP assessment in that it assesses compliance with a group supervision structure, 

which is still under discussion and development in most jurisdictions and within the IAIS, 

where revision of the insurance ICPs that may reflect these changes may not be finalized 

until 2011. 

30. Insurance regulators in the United States are working with regulators around the 

world on initiatives to enhance group supervision, and have in place inter-regulatory 

cooperation processes, such as the use of lead state supervisory structures and the Financial 

Analysis Working Group of the National Association of Insurance Commissioners (NAIC). 

In addition, the Report acknowledges the comprehensive review underway with the Solvency 

Modernization Initiative which takes into account international and cross-sectoral practices in 

the analysis of possible additions or modifications to current insurance regulatory practices. 

31. U.S. authorities remain strongly committed to prudential regulatory independence and 

accountability, including continually striving to improve ways to effectively balance these 

two objectives. Transparent rulemaking with opportunity for stakeholder involvement, for 

example, has proven a particularly effective way to provide accountability and improve the 

regulatory environment, while respecting regulatory independence. As reflected in the 

assessment of ICP 3, the Supervisory Authority standard, the assessment appears to rely on 

structural characteristics while failing to fully recognize the effective operational 

independence of state insurance regulators. In practice, the U.S. multijurisdictional approach 

to insurance regulation holds regulators accountable to each other in a peer review process 

that includes on-going nation-wide monitoring through the NAIC, regular dialogue among all 

regulators, and the ability of states to question the actions of fellow state insurance 

regulators. 
 25 

32. Within the assessment, there appear to be philosophical preferences for a principlesbased, rather than rules-based, approach to regulation, yet assessment recommendations 

inconsistently apply those preferences by variously seeking more, as well as fewer, rules. 

Further, there appears to be no empirical evidence to suggest that one approach is superior to 

the other or that the choice of approach affects the U.S. regulators’ ability to meet the 

standards set out in the various ICPs. U.S. authorities fully support a regulatory environment 

based on principles and made operational by rules that can provide consistent standards 

throughout the marketplace, yet remain flexible enough to adapt to new developments. 

33. The IMF’s assessment of ICP 28, the AML and CFT standard, identified some areas 

where U.S. AML requirements may be improved upon, but fails to fully recognize the robust 

protection provided U.S. citizens against money laundering activities. Of note, the United 

States has a bifurcated regulatory scheme regarding AML regulation. As noted, the federal 

government has primary jurisdiction of AML statutes while the regulation of insurance and 

expertise in financial examination of insurance is the responsibility of the states. Although 

both state and federal authorities have agreed to work together to review the current 

examination process, it is important to note and remember that an in-depth legal analysis has 

yet to be undertaken on this subject. 

34. U.S. Authorities appreciate the assessment and will thoroughly review the Report’s 

recommendations and take them into account when initiating and implementing any 

insurance regulatory reforms. We look forward to engaging in continuing ongoing dialogues 

with the IMF on how to best collectively improve international financial stability and 

supervision of the global financial services sector. 
 26 

II. DETAILED ASSESSMENT

Table 4. Detailed Assessment of Observance of the Insurance Core Principles

Conditions for Effective Insurance Supervision 

Principle 1. Conditions for effective insurance supervision 

Insurance supervision relies upon:

- a policy, institutional and legal framework for financial sector supervision 

- a well developed and effective financial market infrastructure 

- efficient financial markets. 

Description Insurance regulation is carried out against the background of a highly-developed legal and 

institutional framework and mature and liquid financial markets. 

While insurance regulation is principally a responsibility of the states, there is a developed national 

framework of coordination across state insurance departments (see introduction to this assessment). 

Policy on wider financial sector issues, including the maintenance of financial stability, is handled 

at the federal level, in Congress and by relevant agencies of the executive branch, including the 

President’s Working Group on Financial Markets. 

Certain federal legislation has regard to the insurance sector. For example, the 1999 Gramm-LeachBliley Act (GLBA), which established the framework for the regulation of cross-sector 

conglomerates, provides for federal regulation of conglomerates containing insurers, while 

preserving the regulation of individual insurance companies as a state responsibility. There is 

regular dialogue between the NAIC and federal banking supervisors, building on the increased 

cooperation that followed, and is required under, the GLBA. 

The provisions of the federal Bank Secrecy Act on anti-money laundering apply to certain 

insurance business (see assessment of ICP 28). 

However, because it is mostly a state responsibility, insurance regulation is not directly represented 

in federal discussions of wider financial sector issues, particularly financial stability policy. 

Expertise on insurance issues in the Treasury Department, although growing, has traditionally been 

focused on federal programs such as TRIA, and on insurance dialogues with foreign governments. 

During the financial crisis, to the extent that the insurance sector was affected, the monitoring of the 

sector and most of the action to address issues has been carried out by states. However, federal 

support for financial institutions under the Troubled Assets Recovery Program (TARP) has been 

extended to insurance groups, although only where there was a federal regulator (because the group 

also contained at least one institution federally chartered as a bank or thrift). The intervention in the 

insurance conglomerate American International Group (AIG), which also included a thrift, was 

undertaken by federal authorities. 

The administration and Congress are working on proposals for reform that would strengthen federal 

government capacity in insurance through a new office dedicated to insurance issues within the 

Treasury Department. One function of such an office may be to take the lead on international policy 

and coordination in relation to prudential supervision of insurance. Staff from state insurance 

departments and from the NAIC, rather than the federal government, negotiate in international fora 

on insurance regulation (but not on trade issues) at present, although under the U.S. constitution, 

only the federal government has powers to conduct foreign policy. 
 27 

The reforms may also result in some insurance groups being brought within the scope of federal 

regulation aimed at systemically important institutions. Insurance issues affecting financial stability 

would be handled by the Secretary of the Treasury, supported by the new office within the 

department, on a proposed new Financial Services Oversight Council of financial regulators which 

would be responsible for identifying emerging systemic risks and improving interagency 

cooperation. 

These discussions on regulatory reform were continuing at the time of this assessment. 

The legal and court system, at state and federal level, provide for disputes on insurance issues to be 

heard and resolved through enforceable decisions. There is extensive insurance expertise in the 

legal profession. Mechanisms for alternative dispute resolution are rare by comparison with many 

other countries. In respect of retail consumer complaints against insurance companies and 

intermediaries, a key focus of such mechanisms in other countries, departments themselves take a 

direct role in hearing and adjudicating on complaints and requiring companies and intermediaries to 

take appropriate action, where the department judges necessary. 

There is also an extensive framework of accounting, actuarial and auditing standards and relevant 

professional bodies. Their standards are in compliance with international standards. 

• Accounting for insurance assets and liabilities for regulatory purposes has to be undertaken 

using standards (Statutory Accounting Principles—SAP) developed under NAIC processes, 

codified in the NAIC’s Accounting Practices and Procedures Manual (APPM) and 

implemented in state laws and regulations. Regular financial reports to the regulator must be 

drawn up using these standards. These are available to the public via insurance departments or 

the NAIC. U.S. GAAP accounting (FASB) standards also set out accounting requirements for 

insurance but apply only to publicly-traded insurance companies. There is extensive dialogue 

between insurance regulators, FASB and practicing accountants, particularly on the 

development of SAP. 

• There is an extensive body of actuarial standards—ASOPs—set by the Actuarial Standards 

Board (ASB). This is a non-statutory self-regulatory body established by the five actuarial 

professional bodies to promulgate standards which actuaries must use when providing 

professional services in the U.S. ASOPs provide a principles-based framework to support 

professional advice, mainly in the form of guidance. They are not formally part of regulatory 

requirements (and may potentially conflict with such requirements) but reference is made to 

them in regulatory requirements such that actuarial work and opinions required for regulatory 

purposes must in practice comply with ASOPs. 

• The requirement for use of ASOPs is contained in the (separate but identical) Codes of 

Professional Conduct which the professional bodies adopt and apply to members. Ethical 

standards are set and enforced by the professional bodies themselves. 

• A separate body, the Actuarial Board for Counseling and Discipline (ABCD) hears disciplinary 

cases and makes recommendations for action to the professional bodies themselves. Since it 

began work in 1992, the ABCD has recommended severe sanctions (public reprimand or 

expulsion) in 18 cases. There is extensive cooperation between the actuarial profession and 

NAIC, particularly on technical issues. 

• Auditing standards applicable to insurance are the same as for companies generally—for 

publicly-traded companies, those of the Public Company Accounting Oversight Board 

(PCAOB), as modified or supplemented by the SEC; and for others, those of the Auditing 

Standards Board of the American Institute of Certified Public Accountants (AICPA). PCAOB 

standards are applied and enforced by the PCAOB on auditors of publicly-traded companies 
 28 

under the Sarbanes-Oxley Act of 2002. The AICPA requires members to use its standards 

through its binding Code of Professional Conduct. 

Accounting, actuarial and auditing standards are publicly available. 

Insurance departments monitor the quality of accounting, actuarial and auditing work and report 

individuals and firms to professional bodies where they have serious concerns. Regulatory 

standards and practices are updated to reflect market wide concerns—for example, disclosures have 

been extended in response to concerns over potential under-reserving in certain business lines. 

There is a generally an adequate supply of professional services available to support the business of 

insurance and insurance regulation. There are over 16,000 members of the actuarial profession. 

There is wide availability from public sources of the basic economic, financial data and social 

statistics relevant to insurance and insurance regulation. For example, data on mortality are made 

available by the actuarial bodies. 

The money and securities markets provide for the variety of short and long term instruments 

necessary to back insurance liabilities—with some exceptions, as in other countries, for example in 

relation to the particularly long term liabilities associated with some annuity contracts. 

Assessment Largely Observed 

Comments The preconditions for effective insurance supervision are generally met—reflecting the highly 

developed legal and institutional framework within which it operates and the scale and liquidity of 

U.S. financial markets. But there is a need for some development of the policy framework in 

relation to insurance and financial stability and international issues. 

Because insurance regulation is state-based, whereas the broader regulatory and financial sector 

policy framework, including international relations, falls to federal authorities, there is a risk of a 

lack of coordination on insurance regulatory matters. This risk arises particularly in relation to the 

impact of insurance groups and the insurance market on system wide stability, where there are at 

present no explicit responsibilities or coordination arrangements. 

On international insurance regulatory issues, there is a mismatch between the authority reserved to 

the federal government to enter into international agreements and that of the states to regulate the 

insurance sector, taking account of such agreements. This has not prevented sensible and practical 

arrangements, for example to enable states and the NAIC to contribute their expertise to the 

negotiation of international agreements. However, current arrangements have led to some 

ambiguity and uncertainty, particularly outside the United States, about the status of the NAIC and 

state regulators in relation to international agreements. 

In this context, there is a need for: (i) increased information-sharing and coordination between state 

regulators and federal authorities, including representation of state regulators in national bodies 

with responsibilities for system wide oversight and financial stability; (ii) agreed policies and 

procedures for the regulation of systemically important institutions, markets and instruments, where 

assessed to exist in the insurance sector; and (iii) new arrangements to increase the authority of 

federal authorities in relation to the implementation in the United States of international 

agreements. 

The Supervisory System 

Principle 2. Supervisory objectives 

The principal objectives of insurance supervision are clearly defined. 

Description There is no single statement of supervisory objectives for insurance regulation across the states. 

The 1945 McCarran-Ferguson Act, which returned regulatory jurisdiction over “the business of 
 29 

insurance” to the states, while exempting it from most federal antitrust law to the extent that it was 

regulated by state law, did not set out regulatory objectives. Nor are regulatory objectives generally 

set out explicitly in state legislation (i.e., in the insurance codes of individual states). 

As it is not itself a regulator, the NAIC’s objectives are expressed in relation to its role in providing 

assistance and support for state regulators in achieving their goals. 

Insurance departments express their objectives (or mission) individually and differently, for 

example on their websites. The protection of consumers of insurance products is central to all 

departments’ understanding of their role. This is usually defined as ensuring the financial soundness 

of insurance companies, so as to limit consumers’ exposure to loss due to financial failure, and 

promoting appropriate standards of market conduct (by companies and producers). The focus on 

consumer protection is reinforced in the NAIC’s accreditation process with its objectives of 

ensuring there are “adequate solvency laws and regulations in each state to protect insurance 

consumers.” 

In addition, individual departments have objectives such as: the maintenance of competitive 

insurance markets; eliminating fraud, other criminal abuse or unethical conduct in the industry; 

focusing on consumers’ needs for affordable and available products; and fostering the development 

of the insurance industry. 

The McCarran-Ferguson Act’s focus on the application of federal antitrust law informed an early 

emphasis in insurance regulation on promoting competition but the approach to consumer 

protection has since greatly widened. Many states now have a role in ensuring that insurance is 

available to consumers when private markets are unable or unwilling to underwrite risks—through 

the organization of “residual markets” (see the introduction to this assessment) or through subsidies 

and other support for particular risks, such as health cover for certain otherwise hard to insure or 

uninsurable groups. 

Some states assign development of the insurance sector (including attraction of more companies to 

do business in the state) to insurance departments—because that is where insurance expertise is 

located. 

Insurance departments generally explain how their activities support different objectives. Funding 

arrangements make significant deviations from objectives unlikely. Budgets allocated to 

departments by legislatures are linked to particular tasks—such as examinations or direct consumer 

services—which link back to objectives. Departments may draw attention to conflicts between 

objectives (for example, between consumer protection and industry development), where new 

objectives are under discussion. 

Assessment Largely Observed 

Comments The objectives of departments are generally not established explicitly by law. They reflect the 

evolution of their roles and responsibilities over the years since the McCarran-Ferguson Act, the 

risks and challenges in insurance business in different states and the political preferences of state 

legislatures. The close cooperation of departments through the NAIC processes has helped align 

core objectives. 

Departments have a clear understanding that their primary role is to promote consumer protection 

and the role of departments in this regard appears to be well-understood by the industry and by 

consumers. However, there are differences in the ways individual departments view their 

objectives, which may hamper moves toward greater uniformity of state regulation and limit 

understanding of U.S. insurance regulation, both domestically and abroad. There is also some scope 

for conflict of objectives, in particular given states’ financial interests in attracting more insurance 

business. There should also be an explicit acknowledgment of the need to balance the objectives of 

achieving financial safety and soundness and consumer protection with the desirability of fostering 
 30 

market efficiency and competitiveness. 

Departments, the NAIC and state legislatures should develop a clear, joint statement of the 

objectives of insurance regulation, taking into account good practice internationally, and align the 

objectives of individual state departments with these objectives. This work should address whether 

there are potential conflicts between existing objectives and how to manage them. 

Principle 3. Supervisory authority 

The supervisory authority: 

- has adequate powers, legal protection and financial resources to exercise its functions and powers

- is operationally independent and accountable in the exercise of its functions and powers

- hires, trains and maintains sufficient staff with high professional standards 

- treats confidential information appropriately. 

Description State legislation clearly identifies authorities – state insurance departments for most insurance 

supervisory work (other authorities, including at federal level, also have certain supervisory 

responsibilities). 

Insurance departments have extensive powers to license, supervise and take enforcement action 

against insurance companies. They also have powers to make rules—mostly in the form of 

regulations covering many detailed requirements under delegated authority from state legislatures. 

The legislatures themselves enact most of the principal regulatory requirements. Insurance 

departments have wide-ranging powers to enforce their own rules and state laws (see ICPs 14 to 

16). Departments can and do take urgent action—including using receivership powers against 

companies—where required to protect policyholders. 

Governance structures at insurance departments vary (for example, to take account of whether the 

Commissioner is elected or appointed—see below). But in all departments, authority to exercise 

functions and use powers under state law and regulations is granted to the commissioner, i.e., to an 

individual rather than a body such as a Board of Directors or commission. (Some state laws also 

give certain authority explicitly to a chief examiner). Departments have varying approaches to 

internal control. Powers may be delegated, for example to the chief examiner. Many departments 

have their own internal auditor (reporting direct to the commissioner) and all are subject to the audit 

arrangements of the state administration. 

There are explicit procedures for the appointment of commissioners: 12 of the 56 are directly 

elected and the others are appointed by the state governor, with the advice and consent of the state 

senate, generally to hold office until the term of office of the appointing governor expires. 

Appointed commissioners hold office at the governor’s pleasure—and can therefore be dismissed at 

any time. 

Relationships with the legislature and executive authorities are clear—legislatures enact state laws 

and generally set spending limits (see below). Departments are accountable to legislatures as well 

as state governors and produce annual reports to legislatures on their activities (which are also 

publicly available). 

In general, insurance departments act independently of both state legislatures and other state 

executive offices in their day to day regulation. Powers are vested in the commissioner and there 

are no decisions that require the involvement of executive officers outside the department, for 

example. Independence from other executive officers may be greater where the commissioner is 

elected. 

As parts of state administrations, all departments are subject to state budgetary authority. Spending 

limits are set by the state legislature. 

Departments also collect a large amount of revenue for the states—totaling over US$18 billion in 
 31 

2008. The largest element, the state insurance premium tax, is passed in full to the general fund of 

the state but other elements (fees and assessments) are in most states retained by departments as 

funding for their regulatory and other operations. Fines and penalties usually go into the state’s 

general fund. In many states, amounts raised in excess of spending limits may be retained and used 

to build up a reserve (this approach is known as a “dedicated funding system”); in other states, 

excesses must be passed to the state general fund (a “quasi-dedicated system”). Shortfalls in 

revenue collection have to be addressed through spending cuts or by transfers from reserves. 

In practice, however, legislatures and governors generally determine spending limits according to 

current priorities and financial conditions independent of the availability of dedicated funding. 

Some departments have, for example, experienced significant cuts in spending because of the effect 

of economic recession on state finances. 

There are limits on departments’ discretion to allocate resources as they choose. Some state 

legislatures restrict certain funding to particular purposes or programs. For example, funds allocated 

to direct consumer services (handling complaints, for example) may not be used for the regulation 

of firms—or vice versa. 

Departments have substantially increased resources in recent years. Total budget for all the 

departments was US$1.6 billion in 2008, a 50 percent increase on the 2002 level, and staff totaled 

over 11,905 at the year end. Many contract staff and staff from other agencies are also used—

totaling a further 1,325. (Detailed data on staff numbers, grades and pay ranges by state are 

published annually in the NAIC Insurance Department Resources Report.) In addition, the NAIC 

employs just over 400 staff, many of them in IT support for the extensive NAIC databases. 

The adequacy of state staff resources is considered under the accreditation process. 

Overall resources are greater, in proportion to the size of the market, than at any other national 

insurance regulator in G–7 markets, although comparability among departments and with other 

regulators globally is hampered by the wide and varying functions, regulatory and other, 

undertaken by departments. Resources appear adequate for core tasks, including financial analysis 

and examinations. But departments face some pressures to recruit and retain more highly skilled 

staff—qualified actuaries for example, and staff equipped for the demands of a more risk-focused 

approach to supervision (see ICP 13). 

The accreditation standards include an expectation that departments have specialist resources and 

that these are used on examinations of more complex companies or where there are concerns about 

financial condition. Departments are able to hire external experts and outsource work to supplement 

staff resources, where legislation specifically permits it—in particular to support examinations (the 

model law specifies a wide range of professional competencies) or action taken in response to a 

breach in minimum RBC requirements (a Regulatory Action Level event—see ICP 14). 

Staff remuneration is generally linked to the general pay grades for state employees. Some states 

have limited flexibility to pay above normal rates to meet particular needs. Most are free to pay 

market rates for consultants for examination work, for which costs are charged to companies. Partly 

as a result, use of experts is particularly common for examinations. External experts are subject to 

the same confidentiality requirements, under the terms of their contracts, as staff in respect of their 

work for insurance regulators. 

 

Staff have legal protection from lawsuits resulting from specific actions taken in the course of 

regulatory work. For example, the Model Law on Examination, #390, provides for immunity from 

liability for statements made or conduct performed in good faith while carrying out the provisions 

of the Act. Insurance departments protect staff from the costs of defending their actions, where this 

is necessary. 

Insurance supervisory work, like administration generally in the United States, is subject to a strong 
 32 

presumption that information should be made publicly available, absent specific provisions 

requiring confidentiality. The ability of departments to maintain the confidentiality of relevant 

supervisory information varies. Information gathered from companies using the powers of 

examination is protected in all states as are RBC returns (the accreditation process addresses this 

issue). All states are able to protect information received from other government agencies, 

including other state regulators (“derivative confidentiality”). Following an NAIC initiative in 2000 

on confidentiality and information sharing internationally, provisions of several model laws were 

changed to provide for the protection of information received from international regulators. 

Assessment Partly Observed 

Comments While the vesting of regulatory powers in the commissioner in principle ensures that departments 

are operationally independent, the ability of the governor in most states to dismiss commissioners at 

any time, and without a public statement of reasons, exposes departments to potential political 

influences. Elected commissioners may be subject to the pressures of the electoral cycle. 

In addition, departments are dependent on state legislatures in respect of principal legislation 

(where they compete for time with many other state legislative priorities) and for budgetary 

resources, which cannot always be allocated according to the departments’ own regulatory 

priorities (although income from examination work charged to companies can mitigate budgetary 

pressures). Departments are exposed to budgetary cuts during economic downtowns, when 

workloads tend to rise. The use of statewide remuneration policies constrain departments’ ability to 

hire specialist skills and can result in extensive and (for companies being examined) costly reliance 

on external experts, including consultants. 

 

The NAIC and state legislatures should make reforms such as (i) providing for fixed terms to be 

standard for commissioner appointments, with dismissal mid-term to be possible only for 

prescribed causes and with publication of reasons; (ii) making departments fully self-funding, 

subject to continued accountability to and oversight by state legislatures, while allowing them 

greater flexibility to hire staff with specialist skills and reduce reliance on external experts; and 

(iii) extending the rule-making powers of departments to a wider range of technical issues (for 

example valuation and risk-based capital), and subject to appropriate consultation and requirements 

for due process. This last approach may also help deliver faster implementation of NAIC model 

laws. 

State laws should be changed, where this has not already been done, to extend the protection of 

information received from other government agencies to foreign agencies, which is essential to 

support the widest scope of information-sharing internationally. The NAIC and state legislatures 

should consider extending the protection of confidentiality, to the extent consistent with the wider 

legal environment, to all relevant information which is received by departments, rather than 

limiting protection according to the source of the information, as at present. 

Principle 4. Supervisory process 

The supervisory authority conducts its functions in a transparent and accountable manner. 

Description Laws and regulations are developed, at state level and at the NAIC (for model laws), through an 

open process that allows for extensive input from interested parties, and opportunities to influence 

decisions, at both state and national levels. Administrative measures (including regulations made by 

departments under authority from legislatures) are subject to Administrative Procedures Acts in 

each state which require departments to publish proposed rules and regulations and accept public 

comment. 

There is no requirement for quantitative analysis of the costs or benefits of proposed new 

requirements (or regulatory impact assessment of any kind). Such work is carried out occasionally 

rather than routinely. 

All laws and regulations of individual states are published and accessible on relevant websites and 
 33 

are updated as requirements change. In this respect, departments are bound by state policies and 

procedures which mandate a high degree of openness and availability of information. The NAIC is 

similarly committed to openness and model acts and other material are available, although for the 

most part only on payment of a fee. 

Summary information on the NAIC’s accreditation process is publicly available—a 14 page 

pamphlet sets out the standards and processes. This publication mentions that all states and the 

District of Columbia are currently accredited. However, reports and scores relating to individual 

departments are not available to the public (even states themselves see only the reports and not the 

scores). The NAIC also publishes: 

• a report, Model Laws, Regulations and Guidelines, which includes, for each instrument, a 

“state action page” citing each state's enacted model or similar and related legislation. This 

makes it possible to monitor differences between model laws and state measures; and 

• a Compendium of State Laws on Insurance Topics which sets out in chart form state laws on 

specific issues, allowing cross-state comparison by topic. 

These publications are available for a fee. 

The NAIC carries out periodic self-assessments of the compliance of U.S. regulation with IAIS 

Insurance Core Principles. However, until recently, the most recent published self-assessment 

related to 2001 and the version of the Insurance Core Principles issued in October 2000, which has 

since been revised and extended. 

Within individual departments, governance arrangements (which differ by state) are in place to 

maximize consistency of decision-taking. Key decisions may be delegated to chief examiners or 

referred to the commissioner only with the evidence of sign off from all relevant departments and 

officers. 

Decisions on the use of regulatory powers are subject to appeal and to judicial review. This is 

provided for by individual model laws. Companies may also appeal against findings in draft 

examination reports. Initial appeals are normally to the commissioner but may be heard by other 

senior staff in the department (not the relevant analyst or examiner); or an officer may be 

designated in law to hear appeals. Beyond that, cases can be litigated through the courts. (See in 

particular NAIC Model Regulation to Define Standards and Commissioner’s Authority for 

Companies Deemed to be in Hazardous Financial Condition, section 4 C, which gives an insurer a 

right to a hearing; and section 5, which prescribes judicial review of any order or decision of a 

commissioner in relation to this regulation; the Insurance Holding Company System Model Act 

(#440) by contrast provide for judicial review on commissioner decisions on application to a court). 

Separate procedures apply in the case of receiverships—see Insurer Receivership Model Act, 

section 205, which provides for appeal to the receivership court. Once a receivership decision is 

confirmed by the court, departments are not required to await the outcome of an appeal before 

appointing a special deputy receiver to manage the company. Internal processes allow for urgent 

decision-taking where required to expedite action that is required to meet regulatory objectives. 

Regulatory actions are published. 

A number of model laws and regulations give commissioners discretion to exempt insurers or 

transactions from requirements by order or regulation (see for example, section 4 J of the Insurance 

Holding Company System Model Act (#440)). In the area of accounting, departments may, on 

application of an insurance company, agree to a modification of requirements. These “permitted 

practices” are published in full by individual companies, including the impact of the modification 

on surplus, and in some years have been published on the NAIC’s website soon after the end of the 

year to which they relate. 
 34 

The departments publish annual reports on activities and performance. The NAIC publishes both an 

annual report and the Insurance Department Resources Report which catalogues resources available 

to individual state departments and regulatory actions taken in the course of the year. Information 

on the role of the departments is made available on websites and the role of most departments in 

handling consumer complaints has promoted an awareness of their regulatory role in protecting 

consumers. 

Assessment Largely Observed 

Comments Insurance regulation is carried out openly and transparently, with clear accountability to the state 

administration and legislature and rights of appeal (and judicial review) which balance the need for 

due process with the importance of regulators being able to act swiftly and decisively where 

necessary to achieve regulatory objectives. However, measures could be considered to foster 

improved understanding of the work of the states and NAIC and to increase regulatory impact 

analysis. 

In particular, the NAIC should: (i) make publicly available some information that is currently 

available only on payment of a fee or by subscription (for example the NAIC model laws and 

material on how states have adopted them); (ii) publish summary information on their assessment 

of states’ compliance with accreditation standards (even if scores remain private); and (iii) commit 

to publication on a regular basis (maybe every two years) of their self-assessment of compliance 

with IAIS Insurance Core Principles. These measures would help to foster improved understanding 

of state regulation and the role of the NAIC. 

In addition, the NAIC should develop its approach to regulatory impact analysis and make such 

work a routine part of its analysis of proposed new or changed requirements. 

Principle 5. Supervisory cooperation and information sharing 

The supervisory authority cooperates and shares information with other relevant supervisors subject 

to confidentiality requirements. 

Description There is extensive sharing of information between individual insurance departments and between 

departments and the NAIC. The NAIC developed a Master Information Sharing and Confidentiality 

Agreement for its members, into which all states have entered. 

The accreditation process assesses whether departments have policies and procedures for sharing 

information. The standard requires that information be shared with regulatory officials of any state, 

federal agency or foreign country providing that the recipients are required, under their law, to 

maintain its confidentiality. The extension to foreign countries followed an NAIC initiative to 

update the confidentiality and information sharing provisions of several key model laws to allow 

for the sharing of information with international regulators. Specifically, the Model Examination 

Law, Standard Valuation Law, Risk-Based Capital For Insurers Model Act and Insurance Holding 

Company System Regulatory Act were revised. 

There is extensive information sharing with federal agencies. These include banking supervisors 

(particularly in relation to the nine groups with bank holding companies regulated by the Federal 

Reserve and the 42 groups which also contain a thrift regulated by the Office of Thrift 

Supervision). A Joint NAIC/Federal Banking and Thrift Regulatory Agencies Forum meets 

quarterly. There is also cooperation with federal authorities responsible for the various government 

programs—Treasury Department (TRIA), FEMA (flood insurance), Department of Agriculture 

(crop insurance), and the Department of Labor (workers compensation). 

Generally, however, departments, and particularly the NAIC whose involvement results from its 

role in managing the extensive databases on insurance companies across the country, provide 

information to these agencies in a one way flow. The amount of reciprocal exchange and discussion 

of issues is limited—except where events force such exchanges. There were, for example, extensive 
 35 

exchanges in relation to the crisis at AIG and in its aftermath. 

There is no requirement for the signing of a Memorandum of Understanding or other formal 

agreement prior to sharing of information with another supervisor, domestic or foreign. The scope 

of information exchange can be wide, encompassing confidential financial data and factual material 

on companies, their officers etc. There is no requirement for reciprocity of information exchange – 

departments will exchange information without requiring information to be provided in return. 

Departments have to ensure that the recipient of information can keep it confidential before 

releasing the information. 

In respect to information-sharing with foreign regulators, the NAIC has developed with the EU a 

model information sharing agreement for use as a basis of bilateral MoUs generally. All MoUs are 

signed with foreign regulators directly by individual insurance departments. 

The current body of MoUs reflects the key international relationships in respect of major global 

groups with operations in the United States and major U.S. companies’ operations abroad. MoUs 

are also in place between some states for which global reinsurance providers are of particular 

importance (because of the significance of catastrophe risks) and the countries where the global 

reinsurance companies are located. However, departments would exchange information on request 

with other regulators provided that they are assured it will be treated as confidential. 

Partly because many MoUs have been put in place in response to particular needs for regular 

information exchange relating to particular groups or markets, such exchanges are taking place, 

bilaterally and, in some cases, within the framework of supervisory colleges. These actual 

exchanges at present focus on these particular needs—and departments are not likely to take the 

initiative to inform home or host supervisors of changes in supervisory practice that would affect 

relevant groups. They would inform home or host regulators in advance of taking regulatory action, 

taking into account the materiality and likely impact of the action in the other jurisdiction. 

Assessment Largely Observed 

Comments Although the main focus of information exchange with other regulators has traditionally been on 

cooperation with other insurance departments, regulators are able to share information with relevant 

federal authorities and with regulators abroad. There is a need to continue developing the network 

of MoUs. Many have been put in place only recently and the network is not comprehensive. As 

mentioned in connection with ICP 3, all state insurance departments should ensure that laws are 

updated to enable them to protect information received from foreign regulators. This will ensure 

that overseas regulators are not deterred from sharing information freely. 

The Supervised Entity 

Principle 6. Licensing 

An insurer must be licensed before it can operate within a jurisdiction. The requirements for 

licensing are clear, objective and public. 

Description The insurance business that requires licensing is defined, for each state, in the state insurance codes, 

in terms of lines of business that are permitted to be undertaken. States adopt broadly similar, but 

not uniform approaches. 

The scope of the licensing requirement is broad and covers most of what would generally be 

regarded as insurance business. Typical exclusions are product warranties, certain pet insurance and 

prepaid funeral plans. Entities owned by state governments that write insurance business may be 

subject to licensing requirements but this varies by state as do miscellaneous exemptions, for 

examples for certain charitable organizations. 

Life insurance must be undertaken in a different corporate entity from property and casualty 

business (there is one company which still operates as a composite, having been subject to 
 36 

grandfathering when the new approach was introduced). Insurance companies may be established 

as corporates or as mutual companies. 

Under state insurance law, there are few restrictions on a licensed insurer’s ownership by, or 

affiliation with, other financial or non-financial companies provided the owner meets criteria 

through the regulatory approval process. An exception is a widespread prohibition on foreign 

government ownership of an insurer. 

Insurance companies generally have to obtain a license (known as a certificate of authority) to 

conduct business from each jurisdiction in which the company wants to underwrite insurance. The 

exceptions are surplus lines business (see introduction to this assessment) and reinsurance, where 

provided the company has a license in one state, it can undertake business in other states without a 

separate license (it may be subject to other requirements of the host state in which it is writing 

business). 

Insurance companies based outside the United States have to be licensed in the states in which they 

propose to write business, whether as a subsidiary or a branch. Reinsurance may be written directly 

by an overseas reinsurer with a primary insurer based in the United States (although it may not 

attract credit in the primary insurance company’s financial statements). Departments consult with 

the home supervisor before licensing a company (or a company with a parent) based outside the 

United States and obtain necessary information on the status of the company and the business 

which it is licensed to write in the home market. 

Minimum conditions for licensing are set out in state legislation. There is no NAIC model law on 

licensing nor is licensing covered by the accreditation process at present. New accreditation 

standards related to company licensing have been agreed and will take effect on January 1, 2012. 

Requirements in state law generally refer to minimum ongoing requirements—for example, that 

applicants meet the requirements for surplus funds set out in the general requirements. There may 

be certain overriding criteria that are less objective in nature—for example enabling the 

commissioner to refuse to issue or renew a license if such refusal is judged to promote the interests 

of the people of the state. 

The NAIC has developed a standard form and process for application – the Uniform Certificate of 

Authority Application (UCAA), which all states accept for all lines of insurance except Health 

Maintenance Organizations (HMO). Under the UCAA arrangements, a distinction is made 

between: 

• a primary application—where a company is applying to establish for the first time as a 

corporate entity in a state or is moving its corporate location to that state (“redomesticating”); 

and 

• an expansion application—where the company is already licensed in one state and wishes to do 

business in another. 

• The process provides for more time to consider a primary application (90 days) than an 

expansion application (60 days)—in both cases, more time may be required, and if so, will be 

taken in practice. 

• The UCAA is a NAIC guideline and not a model law. Individual states may impose additional 

licensing requirements. 

Under the UCAA process, applications must include information that will enable insurance 

departments to assess the standing and financial condition of the insurance company. Information 

has to be submitted covering: the business profile of the applicant; any management offices that 
 37 

exercise control over insurance operations and any operation that is delegated to an affiliate or third 

party; the plan of operation setting out the product lines planned by the applicant. The applicant 

must submit a “Biographical Affidavit” on behalf of all officers, directors and key managerial 

personnel of the applicant and individuals with a ten percent (10 percent), or more, beneficial 

ownership in the applicant and the applicant’s ultimate controlling parent (see ICP 7). 

In considering applications for licenses, departments investigate litigation, criminal, Uniform 

Commercial Code and bankruptcy records in respect of these officers. Typically, at least one 

business character reference must be obtained for each individual, such as from an attorney, partner 

or other business associate familiar with the business dealings of the individual. Some states require 

additional information including fingerprints in the license application. 

States require various degrees of experience to fulfill state seasoning requirements before an insurer 

can be licensed to conduct business. Time periods may be reduced for special exceptions or if an 

applicant demonstrates sufficient business experience. 

• The UCAA also requires that the applicant show it meets each state's statutory minimum paidin capital and surplus requirements. The level of surplus required is determined after 

considering the applicant's product line, operating record and financial condition. Additional 

surplus above the statutorily prescribed minimum may be required of individual applicants. 

• Applications for expansion or redomestication must include a copy of the most recent Annual 

Statement, actuarial opinion, audited report performed by a CPA who is not an employee of the 

applicant. 

• If an applicant, its parent or its ultimate holding company is publicly traded, it has to submit a 

copy of the applicant's most recent U.S. GAAP consolidated financial statements. Applicants 

who are members of a holding company system (see ICP 17) have to include a comprehensive 

debt-to-equity ratio statement. 

A summary of the applicant's reinsurance program, listing all reinsurance agreements and providing 

a basic explanation of each agreement also has to be included with the application. 

Assessment Observed 

Comments While approaches in individual departments vary, the core requirements embodied in the UCAA 

process adopted by all states represent a comprehensive set of requirements and processes for 

insurance company licensing. (See ICP 24 on producer, i.e., intermediary, licensing). 

Differences between state requirements, on licensing and other issues, could in principle encourage 

companies to choose for their domestic regulator a state with less onerous requirements and to 

redomesticate as individual state requirements or their business needs develop. In practice, 

departments and the NAIC staff appear alert to these risks and, for example in relation to 

redomestication applications, consult with the previous domestic state on the circumstances of the 

application before agreeing to a license. The system of retaliatory taxes may discourage 

redomestication for tax reasons. 

The number of redomestications is monitored—at an average of 50 per year in 2006–8, it is less 

than 1 percent of the total of nearly 8,000 companies at end-2008. 

The extension of the accreditation process to licensing standards in 2012 should nonetheless 

provide assurance that the core licensing requirements are being complied with in practice by state 

departments. 
 38 

Principle 7. Suitability of persons 

The significant owners, Board members, senior management, auditors and actuaries of an insurer 

are fit and proper to fulfill their roles. This requires that they possess the appropriate integrity, 

competency, experience and qualifications. 

Description Departments focus on the fitness and propriety of significant individuals in the course of reviewing 

applications from new companies and in their examination work in respect of licensed companies. 

There are no requirements for individuals themselves to seek authorization or approval (licensing of 

producers, by contrast, is done on an individual basis). Nor are there detailed provisions in law 

defining when an individual will be regarded as fit and proper. 

In relation to significant owners, departments’ requirements are based on the Insurance Holding 

Company System Model Act (#440), which in Section 1 defines control in terms of “the possession, 

direct or indirect, of the power to direct or cause the direction of the management and policies of a 

person.” In addition, “Control shall be presumed to exist if any person, directly or indirectly, owns, 

controls, holds with the power to vote, or holds proxies representing, ten percent (10 percent) or 

more of the voting securities of any other person.” Fitness and propriety is assessed at application 

and on change of control (see ICP 8). 

The process for considering individuals in connection with applications is described under ICP 6. 

On an ongoing basis, licensed insurers are required to report changes in officers, directors and key 

managerial personnel. After such changes are reported, supervisors may then request biographical 

affidavits for newly appointed officers, directors and other key management personnel. There is no 

specific requirement on companies to notify the department when they become aware of issues in 

relation to the fitness and individual of a key functionary. 

As part of the on-site examination process conducted at least once every five years, the suitability 

of the Board of Directors, management, auditors and actuaries is assessed. The approach to be taken 

is set out in the Financial Condition Examiners Handbook, which is publicly available for a fee. 

This assessment focuses on the independence, experience and background and ethics of these 

individuals and functions. Individuals are interviewed to assess suitability. If deficiencies are 

identified, the examination team makes recommendations for improvements to the insurer and 

adjusts its ongoing solvency monitoring of the insurer accordingly. Through the use of tools such as 

increased reporting requirements or more frequent examinations, regulators aim to provide a strong 

incentive for the insurer to make changes in those areas where unsuitable individuals are identified. 

Where an insurer is deemed to be in a hazardous financial condition, the department can use 

specific powers under their implementing measures to order companies to “adopt and utilize 

governance practices acceptable to the commissioner.” (Model Regulation to Define Standards and 

Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition, #385). 

 

Requirements as to the integrity, competency, qualifications and experience of the company’s 

appointed actuary are included in the NAIC Actuarial Opinion and Memorandum Regulation 

(#822) for Life Insurers and in the NAIC Annual Statement Instructions for Property & Casualty 

Insurers. Adoption of these two items is required under the accreditation program. This guidance 

requires insurers to utilize an appointed actuary who is a member in good standing with either the 

American Academy of Actuaries or the Casualty Actuarial Society. The guidance also prohibits 

actuaries who have committed specific violations from acting as the appointed actuary. 

Departments refer concerns about particular actuaries to the professional bodies. 

Under the NAIC Annual Financial Reporting Model Regulation (#205), which is covered by the 

accreditation standards, departments impose independence and experience requirements on 

auditors, but do not prior approve appointments of auditors. However, departments can prohibit 

auditors who have committed specific violations or who do not meet other qualification standards 
 39 

from performing insurance company audits. As part of this process, the auditor must submit a letter 

of qualifications indicating their knowledge and experience in the industry to the supervisor on an 

annual basis. 

Departments may also refer CPAs, where they have concerns, to their professional body (the 

American Institute of Certified Public Accountants) or to the state’s Board of Accountancy which 

has oversight responsibility for audit work (the PCAOB covers auditors on publicly-traded 

companies). 

There are no specific provisions enabling departments to disallow actuaries, auditors and senior 

managers from simultaneously holding two positions that could result in material conflict. 

Departments would use powers and procedures described above to prevent or rectify such conflicts 

based on their assessment of circumstances at each firm. 

Assessment Largely Observed 

Comments Departments take a view on all significant owners, Board members, senior management, auditors 

and actuaries and take appropriate action where concerns arise. However, the approach is based on 

assessment of the fitness and propriety of key functionaries at the point of application for a license, 

and on an ongoing basis through the examination process, rather than the approval of individuals 

(which is the approach taken in some other countries). Specific requirements in relation to 

individuals’ fitness and propriety should be adopted. There are also gaps in the specific 

requirements—companies do not have notify departments of concerns about the fitness and 

propriety of key individuals and departments cannot disallow functionaries from holding two 

positions that could result in material conflict. 

 

Principle 8. Changes in control and portfolio transfers 

The supervisory authority approves or rejects proposals to acquire significant ownership or any 

other interest in an insurer that results in that person, directly or indirectly, alone or with an 

associate, exercising control over the insurer. 

The supervisory authority approves the portfolio transfer or merger of insurance business.

Description Change in the control of an insurance company is subject to supervisory approval process 

performed during the off-site monitoring process as required by the NAIC Insurance Holding 

Company System Regulatory Act and Insurance Holding Company System Model Regulation with 

Reporting Forms and Instructions (#440 and #450). 

Adoption of these two models is required under the accreditation program. 

Section 1 of the Act defines control in terms of “the possession, direct or indirect, of the power to 

direct or cause the direction of the management and policies of a person.” In addition, “Control 

shall be presumed to exist if any person, directly or indirectly, owns, controls, holds with the power 

to vote, or holds proxies representing, ten percent (10 percent) or more of the voting securities of 

any other person.” Fitness and propriety is assessed at application and on change of control (see the 

assessment of ICP 8). 

The model laws require departments to evaluate a potential acquirer of control for compliance with 

fit and proper requirements. The acquiring individual or entity is required to complete the 

Acquisition of Control Form (Form A) requiring background information of each applicant. The 

proposed acquisition is approved by the domestic supervisor. There are minimum requirements for 

resources, both financial and non-financial, and a requirement that background information on 

applicants is provided. In addition, there are requirements to ensure that adequate competition 

continues after a change of control and to make sure that policyholders are not adversely impacted. 

Within the Holding Company Act, regulators have clear criteria for denying a change in control. 

The Act provides that regulators can deny an application for change of control for any of the 
 40 

following: 

• After the change of control, the domestic insurer referred would not be able to satisfy the 

requirements for the issuance of a license to write the line or lines of insurance for which it is 

presently licensed; 

• The effect of the merger or other acquisition of control would be substantially to lessen 

competition in insurance in the state or tend to create a monopoly; 

• The financial condition of any acquiring party is such as might jeopardize the financial stability 

of the insurer, or prejudice the interest of its policyholders; 

• The plans or proposals which the acquiring party has to liquidate the insurer, sell its assets or 

consolidate or merge it with any person, or to make any other material change in its business or 

corporate structure or management, are unfair and unreasonable to policyholders of the insurer 

or not in the public interest; 

• The competence, experience and integrity of those persons who would control the operation of 

the insurer are such that it would not be in the interest of policyholders of the insurer and of the 

public to permit the merger or other acquisition of control; or 

• The acquisition is likely to be hazardous or prejudicial to the insurance-buying public. 

These requirements cover acquisition of control, whether the party proposing to acquire control is 

located inside or outside the state, or outside the United States. 

The NAIC recently adopted accreditation standards related to change in control and these standards 

will become effective January 1, 2012. The standards relate to a state insurance department’s 

review of the Form A filing. The standards will require that the filing be reviewed in a timely 

manner and that the department have sufficient, qualified staff to perform this review. Further, the 

standards require that the state have appropriate and sufficient procedures to perform this review, 

including an analysis of many of the items discussed above. It also requires use of the Form A 

database, which is a communication tool on these filings used by the state insurance department to 

collect and organize information. 

Portfolio transfers 

The Holding Company Act requires that the domestic insurance department must be notified of 

major transactions with affiliated entities, which departments interpret as including material 

portfolio transfers between related parties. Assumption reinsurance and bulk reinsurance statutes 

establish thresholds by which material transfers of all or most of an insurer’s business, either in 

total or within a specific line, are subject to review and approval. In some cases, such transfers may 

be subject to approval by non-domestic state regulators. 

Also, state laws concerning the cancellation and non-renewal of an entire book of business or 

specific line of business may require the insurer to provide notice and/or seek approval from state 

regulators for transfers of business. Insurers are also required to provide notice to their 

policyholders of such transfers. 

The NAIC Disclosure of Material Transactions Act (#285) requires insurers to report to their 

domestic regulator other significant asset and reinsurance transactions that otherwise may not have 

been subject to approval. These approval and notification requirements may prompt additional 

inquiry and assessment by regulators and possibly disapproval of such transactions.

Assessment Observed 

Comments There are extensive requirements and related reporting forms governing changes in control and 
 41 

portfolio transfers. 

Principle 9. Corporate governance 

The corporate governance framework recognizes and protects rights of all interested parties. The 

supervisory authority requires compliance with all applicable corporate governance standards. 

Description Corporate governance standards for publicly-traded U.S. companies, including insurers, are set and 

enforced by the SEC, including requirements in relation to expertise and independence for the audit 

committee as well as requirements to maintain effective internal controls over financial reporting. 

Provisions based on SEC requirements will be introduced for all insurance companies through 

revisions to the NAIC Annual Financial Reporting Model Regulation (#205), which take effect in 

January 2010. (See ICP 10). 

There are currently no NAIC model laws or regulations that address corporate governance directly. 

Departments assess governance mainly in the context of applications for licenses from new insurers 

and producers, in requiring and reviewing annual statements, in conducting examinations, in 

approving mergers or other changes of control involving domestic insurers, and in the assessment 

of solvency. 

Of increasing importance in this regard is the risk-based examination process. Under the relevant 

provisions of the Financial Condition Examiners Handbook, examiners must consider and evaluate 

the insurer’s corporate governance and risk management processes. Discussions will be held with 

Board members and with senior management. The Handbook provisions distinguish between the 

role of the Board in providing oversight and the responsibility of senior management to manage the 

business. 

• Issues assessed by examiners in connection with the role of the Board include knowledge and 

experience of directors, independence from management; whether there are adequate Board 

committees, Board oversight of the determination of compensation for executive officers and 

their appointment and termination; sufficiency and timeliness of information provided to the 

Board; and the Board’s role in establishing the appropriate (what the Handbook refers to as) 

“tone at the top” including the development and enforcement of a code of conduct. 

• Issues assessed in connection with the senior management include knowledge and experience 

of management; turnover in key management positions; the nature of business risks accepted 

and the company’s risk assessment processes; access to adequate financial and operating 

information to identify trends or variations from budgets; attitudes and actions toward financial 

reporting and internal controls; and management’s role in developing, communicating and 

enforcing a code of conduct. 

If deficiencies in the corporate governance practices of a company are identified, the examiners 

make recommendations to the company, and update the insurer summary profile and supervisory 

plan accordingly. The department may adjust its ongoing solvency monitoring of the insurer. 

In situations where an insurer is deemed to be in a hazardous financial condition, the insurer can be 

ordered to correct the situation as outlined in the NAIC Model Regulation to Define Standards and 

Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition (#385).

Assessment Largely Observed 

Comments Corporate governance standards for publicly-traded U.S. companies, including insurers, are set and 

enforced by the SEC, while requirements for all insurance companies will be introduced from 

January 2010. 
 42 

Departments have been increasing their focus on governance issues, mainly as a more risk-based 

approach to examinations has started to be implemented (see ICP 13). Examinations had previously 

focused more on financial condition and related controls, with corporate governance receiving more 

limited attention. The new examination approach is still being rolled out but the risk-based 

approach becomes part of the accreditation standards in 2010. Both regulators and companies are 

adjusting to the need to make evaluations in an area of examination where there are few rules 

against which to assess individual company practice—and where, in the case of insurance groups, 

many governance and control functions are organized at group rather than solo company level. 

As examiners gain experience, the NAIC and/or departments should consider issuing more 

guidance on good and bad practices in corporate governance for insurers. This would help 

examiners and firms to develop a clearer expectation of what constitutes effective governance for 

insurance business, including for groups. 

 

Principle 10. Internal control 

The supervisory authority requires insurers to have in place internal controls that are adequate for 

the nature and scale of the business. The oversight and reporting systems allow the Board and 

management to monitor and control the operations. 

Description For publicly traded companies, standards relating to internal controls over financial reporting are 

set and enforced by the SEC. Under the 2002 Sarbanes-Oxley Act, management and the external 

auditor must report on the adequacy of the company's internal control over financial reporting. The 

report must contain an assessment, as of the end of the company’s most recent fiscal year, of the 

effectiveness of the internal control structure and procedures of the issuer for financial reporting. 

A similar requirement has recently been adopted for use in insurance regulation through revisions 

to the NAIC Annual Financial Reporting Model Regulation (Model #205), which is required under 

the Accreditation Program. These revisions will require companies exceeding an annual premium 

threshold (set at US$1,000,000 per year in the model law), inter alia: 

• to have an independent audit committee—the model law sets out detailed requirements as to 

the composition and scope of work of the committee (and smaller companies covered by the 

requirements are exempt from having to have any independent members of the committee); 

and 

• to rotate their audit partner on a regular basis—as in the Sarbanes-Oxley Act, there is a five 

years limit. 

In addition, insurers with US$500 million or more in premium are required to issue Management’s 

Report of Internal Control Over Financial Reporting, attesting to the adequacy of internal controls. 

Similar to the SEC requirements, the attestation must be based on documentation and testing of the 

company’s internal controls, through diligent inquiry. However, unlike the SEC rules, this report 

will not be subject to a separate attestation by the company’s external auditor. 

The revisions to the model law are scheduled to go into effect on January 1, 2010. To avoid 

duplication, companies subject to and in compliance with Sarbanes-Oxley Act equivalent 

requirements are broadly exempt. 

In addition, all insurance entities are required to receive an annual audit in accordance with the 

Annual Financial Reporting Model Regulation (#205). As part of each audit, as required by the 

American Institute of Certified Public Accountants, the CPA must understand and assess an entity’s 

internal controls over financial reporting. When material weaknesses in an insurer’s internal control 

processes are identified during an audit, this model regulation requires the weaknesses to be 

reported to the insurance supervisor for further review. 

As with corporate governance (see ICP 9), internal controls are increasingly being assessed as part 
 43 

of the new risk-based examination process currently being implemented by departments. Use of the 

Examiners Handbook is required under the accreditation program, although the risk-based approach 

takes effect only in 2010. The overarching principles set out in the handbook include the need for 

adequate and clear policies, authorization limits and procedures; comprehensive internal controls; 

and processes to assure compliance with laws and regulations. 

Under the risk-based examination process, the examiner must identify and assess all significant 

inherent risks faced by the insurer, whether they relate to financial reporting issues or to business 

and operational issues. The examiner then identifies and assesses the internal control processes that 

can mitigate each risk. Controls are assessed by considering both their design and operating 

effectiveness. 

The Examiners Handbook sets out an extensive list of the issues to be addressed in the examination 

including: delegation of authorities and segregation of duties; the role of internal audit and the 

external auditor in the overall control framework; the role of the Board in establishing internal 

controls and monitoring their effectiveness. There is detailed guidance on the importance of 

assessing the risk in outsourcing of critical functions. This emphasizes that it is the responsibility of 

management to determine whether processes which have been outsourced are being effectively and 

efficiently performed and controlled. 

Although the adequacy of the function is assessed in relation to the risks and control frameworks of 

individual companies, there are no requirements either that an insurer has an internal audit function 

or in relation to the scope of the work which such a function should carry out. Examiners require 

access to internal audit reports when carrying out their work. 

When weaknesses in the company’s internal controls are identified during the assessment process, 

the company is asked to make corrections to its processes and the supervisor adjusts its ongoing 

solvency monitoring of the insurer accordingly. Through increasing reporting requirements, 

increasing the frequency of examinations, and other means, the regulators aim to provide an 

incentive for the insurer to address internal control weaknesses. 

In situations where an insurer is deemed to be in a hazardous financial condition, the insurer can be 

ordered to correct the situation as outlined in the NAIC Model Regulation to Define Standards and 

Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition (#385), 

which is a required model under the Accreditation Program. 

Assessment Largely Observed 

Comments Other than controls relating to financial reporting, departments have established few rules and 

requirements relating to internal controls on insurers at present. For publicly-traded companies, the 

Sarbanes-Oxley provisions provide a general framework of detailed control requirements and 

testing of controls. From January 1 2010, much of this framework will be extended to all insurers, 

with the exception of smaller companies—after extensive debate with the industry, these were 

excluded from the new approach on the basis that costs would be disproportionate to benefits. 

These requirements will take time to implement in full. 

Departments are increasingly looking to ensure sound internal controls at insurers via the risk-based 

examination process. As mentioned under ICPs 9 and 13, this approach is still being implemented. 

As examiners gain experience, the NAIC and/or departments should consider the scope for issuing 

guidance on good and bad practices in internal control. 

They should also make it a formal requirement for insurers to have an internal audit function. Such 

a function is now widely considered as an important part of a good control framework—similarly to 

audit committees, where there are now extensive requirements of all but the smaller insurers. 
 44 

Ongoing Supervision 

Principle 11. Market analysis 

Making use of all available sources, the supervisory authority monitors and analyses all factors that 

may have an impact on insurers and insurance markets. It draws the conclusions and takes action as 

appropriate. 

Description State insurance supervisory authorities, and thus the NAIC, receive detailed quarterly and annual 

statistical and financial information. The majority of this information is stored in the NAIC FDR 

database. It is readily accessible to all state supervisory authority staff, and is therefore available for 

quantitative analysis of the market. 

 

The NAIC Insurance Analysis and Information Sources Department produces each half year 

separate industry commentaries for each of the life and accident and health insurance industry and 

the property and casualty insurance industry. Each commentary is about 6–8 pages and includes 

quantitative analysis and qualitative explanatory comment on issues such as industry size and 

growth; premium income by major business class and line; operational performance; investment 

income; insurance liability reserves; liquidity and capital as well as market share and market 

concentration information. Trend analysis on key indicators, such as capital and surplus, is 

commonplace in the commentaries. 

 

While the commentaries are for supervisory authority use only, the extremely rich database allows 

the NAIC to make available publicly not only much industry aggregate data but also individual 

insurer data. The latter are often available at a cost, but this does not appear to prevent significant 

further analyses, repackaging and on-selling of this data. So the U.S. market is the most analyzed 

insurance market in the world. 

 

The NAIC also has the expertise and IT capability quickly to analyze its databases to obtain 

answers to supervisory queries about the insurance markets', and individual insurers’, ability to deal 

with market events (e.g. a collapse or default of a major counterparty to which insurers are exposed 

through investments or reinsurance, and the downgrading and devaluation of a certain asset class). 

 

These commentaries are one input used by the NAIC Financial Analysis Working Group (FAWG) 

to decide which sectors of the insurance market may be becoming problematic, or potentially more 

vulnerable to adverse market trends. On occasions this has led the FAWG to require the NAIC 

Insurance Analysis and Information Sources Department to produce special market sector reports 

(e.g., reports on medical malpractice insurance and on financial guaranty insurance) to decide if 

supervisory authority action (sector-wide or only for specific insurers) is required or if temporary 

monitoring is all that is needed. There are several NAIC databases which can be so analyzed, 

including those for consumer complaints, insurance producers (i.e., intermediaries), supervisory 

authority actions and ratings agency actions. 

 

Especially because of the exposure of the U.S. property and casualty insurance market to natural 

catastrophes, the NAIC has built an impressive mechanism to facilitate specific event data 

collection and analysis. Individual states or the NAIC can decide if a special data call is needed. 

Once it has been decided what data or information is to be collected, the call is made using the 

authority under the state's financial examination laws. It is then shared among supervisory 

authorities pursuant to the Information Sharing and Confidentiality Agreement among the states. 

Aggregate and by company data are published (see ICP 26). 

Some industry stress testing has been performed by the NAIC using these capabilities (see ICP 

23). 

Assessment Largely Observed 

Comments The absence of complete group-wide consolidated data for insurance groups and broader financial 
 45 

conglomerate groups hinders the ability of supervisors to analyse and monitor market-wide events 

of importance for the stability of insurance markets. 

The lack of analysis of developments outside the U.S. markets, given that it relies so heavily on 

offshore reinsurers, needs to be addressed. 

Otherwise, the NAIC data sources and analysis capabilities are world-leading. They should be more 

used in international supervisory college discussions to better understand the risks that U.S. insurers 

might create to international groups of which they are members and to encourage insurance 

regulators in other jurisdictions to develop similar capabilities.

Principle 12. Reporting to supervisors and off-site monitoring 

The supervisory authority receives necessary information to conduct effective off-site monitoring 

and to evaluate the condition of each insurer as well as the insurance market. 

Description The NAIC Model Law # 205 Annual Financial Reporting Model Regulation is designed to improve 

the states’ surveillance of the financial condition of insurers by requiring an annual audit of 

financial statements reporting the financial position and the results of operations of insurers by 

independent certified public accountants, communication of internal control related matters noted in 

an audit, and management’s report of internal control over financial reporting. 

The Law specifies that the notes to the financed statements are those required by the NAIC 

Accounting Practices and Procedures Manual (APPM) and Annual Statement Instructions (ASIs). 

The ASIs specify the requirements for, and contents of, the Statement of Actuarial Opinion (SAO) 

and statistical information to be filed. So regulators clearly have the ability to obtain the necessary 

information to undertake regular financial analysis of an insurer's financial condition. It also 

authorizes supervisory access to auditor work papers, lays down membership requirements for 

insurer audit committees and requires senior management attestation to the accuracy and fair 

representation of the financial reports and associated filed material. 

 

Because of its sweeping ambit for examinations, which can be conducted at the "sole discretion of 

the commissioner,” NAIC Model Law # 390 on examinations provides the legal authority for the 

collection of any other information from insurers, even though information collection is not 

specifically referred to in the law. 

 

Differences among the requirements for financial reports and other information reporting reflect the 

different categories of insurance business undertaken, rather than the particular legal form of 

insurers. 

 

All insurers must file information, and the model examinations law effectively allows the 

supervisory authority to obtain information on any subsidiary of the insurer. Group information and 

financial statements are required to be filed via NAIC Model Law # 450 Holding Company System 

Reporting. However, reporting of consolidated group-wide financial and other data, which would 

allow monitoring of insurance regulatory capital compliance for an insurance only group, is not 

required. 

 

The ASIs do specify comprehensive reporting of transactions which can lead to off-balance sheet 

exposures. 

 

NAIC Model Law # 440 Insurance Holding Company System Regulatory Act requires transactions 

between affiliates to be reported before they are entered into. It specifies criteria which they can be 

assessed against, which are designed to ensure arms length dealings. It also provides that the insurer 

cannot enter into the transaction if the supervisory authority disapproves of the transaction. 

Assessment Largely Observed 
 46 

Comments NAIC data sources and analysis capabilities are world-leading. The affiliate transaction 

requirements provide a strong means of identifying and controlling intra-group dealings and 

exposures. However the prior notification requirement may lead to undue ‘prior approving’ of 

many transactions and may represent an ineffective use of supervisory resources (although U.S. 

regulators have found such transactions to be abused in the past). Reporting of consolidated groupwide financial and other data should be required—see also ICP 17 as there is no complete groupwide consolidated data for insurance groups and broader financial conglomerate groups. 

 

Principle 13. On-site inspection 

The supervisory authority carries out on-site inspections to examine the business of an insurer and 

its compliance with legislation and supervisory requirements. 

Description The NAIC Model Law # 390 Examinations (included in the accreditation process) provides the 

authority for the supervisory authority to undertake on-site inspections, which are referred to as 

examinations. 

The commissioner has absolute discretion to require an examination and the form and scope of the 

examination. The law requires that examinations of each insurer must be conducted at least every 

five years (three years in some states). Examinations are conducted to comply with this requirement 

in the law, but also according to priorities developed from off-site analyses of insurer financial and 

other data. 

 

Beginning in 2001, the NAIC began work to move from examinations of an audit/compliance 

nature to risk-focused examinations. This shift is well advanced but still underway. It was formally 

agreed by the NAIC to make this move and in 2007 the NAIC Financial Condition Examiners 

Handbook, which was revamped to reflect this, was approved. The application of this handbook 

became an accreditation standard from January 1, 2010, with accreditation examinations of the 

states commencing then. Major states have begun early adoption of this new approach and there has 

been considerable retraining of examination staff. 

Market conduct examinations are also conducted and there is a NAIC Market Conduct Examiners 

Handbook. Depending on the resources and structure of the state supervisory authority, this 

examination work may be undertaken in conjunction with the financial condition examination or 

separately. Irrespective of which approach is taken, the outcome of market conduct examination 

work is an important consideration in assessing the inherent and residual risks in an insurer. 

The Financial Condition Examiners Handbook outlines seven major phases of the new risk-focused 

approach; namely: 

(1) understanding the company and identifying key functional activities to be reviewed, 

(2) identifying and assessing inherent risk in activities, 

(3) identifying and evaluating risk mitigation strategies/controls, 

(4) determining residual risk, 

(5) establishing/conducting examination procedures, 

(6) updating prioritization and supervisory plan, and 

(7) drafting the examination report and management letter based on findings. 

It also contains substantial amounts of supporting administrative (e.g., sources of material to 

analyze before and during an on-site examination, content of and approach to examination reports 

and management letters to insurers) and technical material (e.g., on reinsurance) to assist 

examiners. 

Examination reports of insurers are available to the public, but examination work papers and 

management letters to insurers are generally not public, although they are available to other state 

supervisory authorities. However, in some states there is some concern that work papers and 

management letters could in fact be obtained under freedom of information and similar state laws. 
 47 

There are extensive supporting NAIC systems for planning, documenting, following up and 

reporting on individual examinations as well as on examination activity in aggregate. 

Tables 19 through 22 of the NAIC Insurance Department Resources Report 2008 provide statistics 

on examinations by type and by state, which show there is extensive exam work occurring. 

Assessment Observed 

Comments The Financial Condition Examiners Handbook is comprehensive, well presented and easy to read. 

It has been sensibly designed to provide concepts and broad steps to follow, and deliberately 

emphasizes the need for examiners to think about issues and risks in the particular insurer in order 

to tailor what is examined in depth, rather than follow a checklist approach. 

From discussions with supervisory authorities and examiner staff and from inspection of 

examination work papers and reports, it is clear that financial examinations are thorough and well 

documented. Examinations also appear to identify the important issues. 

Consideration could be given to how to strengthen the confidentiality of examination work papers 

and findings to ensure that examiners can be frank in their findings and assessments of the financial 

condition of insurers. This will become more important as the risk-focused examination approach is 

rolled out, as proper implementation will require examiners to make more qualitative judgments 

about insurers’ risks and controls, including scoring them for inclusion in the risk matrix. 

The move to risk-focused examinations involves a quantum shift in examination approach, mindset 

and skills. It is a progressive approach which should allow examiners’ assessments to become more 

forward-looking. But effective implementation will not be easy because of the changes it demands 

of examiners. Therefore it is recommended that the NAIC assess the implementation of the riskfocused examination approach in the near future (e.g., in the course of 2012). 

Principle 14. Preventive and Corrective Measures 

The supervisory authority takes preventive and corrective measures that are timely, suitable and 

necessary to achieve the objectives of insurance supervision. 

Description NAIC Model Law # 385 Regulation to Define Standards and Commissioner’s Authority for 

Companies Deemed to be in Hazardous Financial Condition (included in the accreditation process) 

lays down standards or criteria that the supervisory authority can use to determine if an insurer is in 

a hazardous financial condition. These are all appropriate criteria or trigger points and include such 

criteria as reserve adequacy, reinsurance adequacy and collectability, fitness and propriety of 

officers and directors, timely and accurate return filing, adequacy of administrative systems, 

liquidity and appropriateness of affiliate transactions. 

This model law also outlines the actions the supervisory authority can require an insurer to take to 

remedy its financial condition, which may include adjusting reinsurance, reducing or suspending 

acceptance and renewal of business, increasing capital and surplus, suspending dividend payments 

out of the insurer, increasing the frequency of financial reports, providing additional detailed 

reports, providing a new business plan, adjusting premium rates, changing investments and 

correcting corporate governance practice deficiencies. 

The regulatory compliance of insurers and the current position and trend of insurers’ financial 

condition can be determined from the regular financial analyses, examinations, market conduct 

surveillance and examinations and the reasonably regular contact supervisory authorities have with 

insurers. In practice, supervisors raise issues and inappropriate practices with insurers when they 

become aware of them, especially during and following an examination, and they follow up to 

check on insurers’ responses. Therefore they take appropriate and proportional corrective action 

when it is needed. 
 48 

As well as laying down the structure of the regulatory capital requirements the NAIC Model Law # 

312, Risk-Based Capital (RBC) for Insurers sets down four action levels and the types of company 

or regulatory action which must be taken. The levels and associated types of event are: 

• Company Action Level 

3⁄4 Trigger event—insurer capital less than 200 percent of the RBC amount; or for life and/or 

health insurers, capital is less than 250 percent of RBC and has a negative trend; or for 

property and casualty insurers, capital is less than 300 percent of RBC and triggers the 

negative trend. 

3⁄4 Action required—insurer must prepare and submit an RBC Plan which identifies what 

contributed to reaching the trigger event; corrective action proposals; financial projections 

for at least 4 years out (both without and with the corrective action); key assumptions; and 

the problems associated with the insurer’s business. 

• Regulatory Action Level 

3⁄4 Trigger event—insurer capital less than 150 percent of the RBC amount. 

3⁄4 Action required—insurer must prepare and submit an RBC Plan or revised RBC Plan: 

supervisory authority must examine the insurer’s financial condition and review its RBC 

Plan; supervisory authority must issue a “corrective order” specifying the corrective 

actions the insurer must take. 

• Authorized Control Level 

3⁄4 Trigger event—insurer capital less than 100 percent of the RBC amount. 

3⁄4 Action required—as for Regulatory Action Level, or place the insurer under regulatory 

control (i.e., under formal rehabilitation or liquidation) if this is considered to be in the 

best interests of the policyholders, creditors and the public. 

• Mandated Control Level 

3⁄4 Trigger event—insurer capital less than 70 percent of the RBC amount. 

3⁄4 Action required—supervisory authority must place the insurer under regulatory control 

(i.e., under formal rehabilitation or liquidation), except for property and casualty insurers 

in run-off where the supervisory authority may allow the run-off to continue under its 

supervision. 

Assessment Observed 

Comments The structure of prompt corrective action triggers and required actions is thorough and is rigorously 

applied. While it could not, and should not, prevent insurers ever failing, it does lead to reduced 

insurer shortfalls in any failure (guaranty fund data suggests most shortfalls are in the 5–15 

percent of liabilities range). It also provides clear messages to the insurers of the consequences of 

their reducing capital levels. 

Principle 15. Enforcement or sanctions 

The supervisory authority enforces corrective action and, where needed, imposes sanctions based 

on clear and objective criteria that are publicly disclosed. 

Description As described under ICP 14, there is a formal structure of prompt corrective action levels to ensure 

that the deteriorating financial condition of an insurer is addressed early to help prevent insurer 

failure and loss to policyholders. 

Once an insurer is deemed by the supervisory authority to be in a hazardous financial condition, the 

supervisory authority can take a range of actions, such as: 

• requiring the insurers capital levels to be increased; 

• restricting dividend and other payments out of the insurer; 
 49 

• directing the issuing of new, or renewing of current, policies to stop; 

• restricting the insurer dealing with investments and other assets, or require specific investments 

and other assets to be dealt with in a certain manner; and 

• requiring changes in management. 

NAIC Model Law # 558, Administrative Supervision Model Act, allows the supervisory authority 

to place an insurer under administrative supervision by the authority if continuance of the business 

is hazardous to the public or insured parties, the insurer has exceeded its powers or breached 

requirements, the insurer’s business is being conducted fraudulently, or the insurer gives its 

consent. Administrative supervision essentially allows the supervisory authority to exert direct 

control over insurers’ transactional activity related to investments, any dealing with assets, merger 

or consolidation of business, premium rates, reinsurance contracts, policy surrenders, premium 

refunds, management changes and insurer staff remuneration. 

In addition, NAIC Model Law # 555 Insurer Receivership Model Act allows supervisory authorities 

to place insurers into rehabilitation or receivership, which is then supervised by the court, but with 

the supervisory authority as the rehabilitator or receiver. 

Supervisory authorities use their authority to put an insurer under administrative supervision, 

rehabilitation or even liquidation to effect compulsory transfer of obligations from a failing insurer 

to another insurer. This is often done by keeping a failing/failed insurer in run-off and under 

administrative supervision and arranging a reinsurance transaction with the accepting insurer, or 

improving the financial condition of the problem insurer sufficiently for the accepting insurer 

legally to take ownership. 

The supervisory authority can and does use persuasion, civil penalties, follow up action and more 

detailed or focused examinations to prevent insurer breaches and inappropriate practice from 

recurring. Tables 23 through 25C of the NAIC Insurance Department Resources Report 2008, 

which provide statistics on actions taken against insurers, formal hearings with insurers, insurers in 

run-off, insurers under supervision or rehabilitation or in liquidation, demonstrates supervisory 

authorities are active in these areas. 

Throughout the model laws, there are penalty provisions which allow the supervisory authority to 

fine insurers. However, the authority to apply penalties to individuals (apart from producers) for 

breaches of insurance laws is limited. Issues of dishonesty and other felonies are dealt with mostly 

through laws other than insurance laws. In practice the supervisory authority does persuade insurers 

that certain individuals in senior management should leave the insurer, but there is no specific 

authority to bar individual directors or management of insurers from acting in responsible 

capacities in the industry in the future. 

Assessment Largely Observed 

Comments There is no clear authority for the supervisory authority to fine individual directors or senior 

managers of insurers, and to bar them from acting in responsible capacities in the future. The 

insurance laws should be changed to provide the supervisory authority with such clear powers. 

Principle 16. Winding-up and exit from the market 

The legal and regulatory framework defines a range of options for the orderly exit of insurers from 

the marketplace. It defines insolvency and establishes the criteria and procedure for dealing with 

insolvency. In the event of winding-up proceedings, the legal framework gives priority to the 

protection of policyholders. 

Description As described under ICP 15, the legal and regulatory framework provides a clear structure for the 

points at which it is no longer permissible for an insurer to continue its business. 
 50 

The procedures for dealing with insolvency and the winding-up of an insurer are clearly set out, 

with NAIC Model Law # 555 Insurer Receivership Model Act (included in the accreditation 

process) providing specific requirements for the conservatorship, rehabilitation and liquidation of 

insurers. 

Policyholders are given the highest priority in wind-ups after the fees of the receiver are met. 

The broad and comprehensive powers of the supervisory authority for dealing with insurer 

insolvency and wind-up allow for strongly effective protection of policyholder obligations and 

minimal disruption to policyholders in the meeting of these obligations. 

Assessment Observed 

Comments There is a strong focus by the supervisory authorities on ensuring individual policyholder 

obligations are met. Customer complaints handling facilities in supervisory authorities, readily 

available information on the progress of insurer receiverships and a network of insurer guaranty 

funds provide a high level of policyholder protection. The arrangements for insurer wind-up and 

exit from the market are clear, have worked effectively and in conjunction with guaranty fund 

arrangements provide strong protection against policyholder loss if an insurer fails. 

There are not the same clear arrangements for dealing with the exit from the market of a financial 

conglomerate group with insurance subsidiaries (but this is not required by the ICPs). 

Principle 17. Group-wide supervision 

The supervisory authority supervises its insurers on a solo and a group-wide basis. 

Description The U.S. approach to supervision reflects a long-established focus on securing the financial 

soundness of individual insurance companies, if necessary by ring-fencing them from other 

operations in the group. This approach in part reflects the fact that insurance companies are 

generally less exposed than banks to contagion from problems elsewhere in the group. The United 

States has developed an extensive set of tools aimed at monitoring and, as necessary, controlling 

transactions with the holding company. It also has extensive powers to obtain information about 

U.S. entities that are a part of the same group as licensed insurers. 

Key requirements in relation to groups are set out in The Holding Company Act (#440) which 

creates the concept of an insurance holding company system—defined as consisting of two or more 

affiliated persons or entities, one or more of which is an insurer. (An affiliate is an entity that 

directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under 

common control with another entity. Control is presumed to exist when an entity or person, directly 

or indirectly, owns, controls, holds with the power to vote, or holds proxies representing 10 percent 

or more of the voting securities—see ICP 8). 

Groups containing one or more insurance companies may also be covered by the definition of 

financial holding company in the GLBA and the related regulatory requirements. 

Extensive information is collected on holding companies within an insurance holding company 

system and on transactions between the licensed insurer and the rest of the group. For example, the 

Annual Statement must include a detailed organization chart and summary of various types of 

transactions within the holding company system. The annual and quarterly statements also require 

disclosure of whether an insurer is affiliated with one or more banks, thrifts or securities firms (i.e., 

financial conglomerate/financial holding company). In addition, consolidated financial statements 

of the ultimate parent are required to be filed with the state of domicile by any company that is part 

of a holding company group. 

This information is included in the regular financial analysis of insurance companies, which draws 

on guidance for analysts in the Financial Analysis Handbook. Insurers are also required to submit 

ad hoc reports covering: 
 51 

• holding company registration (an insurer must register when it becomes a member of an 

insurance holding company system and annually thereafter); 

• notice of certain affiliate transactions – which are reviewed to determine if they are fair and 

reasonable to the interests of the insurer. Material transactions include sales, purchases, 

exchanges, loans, extensions of credit, guarantees, investments, reinsurance, management 

agreements, service agreements and cost-sharing agreements and there are rules on what is 

considered material; 

• notification of certain merger and acquisitions; and 

• prior approval of any extraordinary dividend or other extraordinary distribution to shareholders 

(definitions of what constitutes “extraordinary” vary by state). 

 

A lead state is designated for each insurance group to coordinate regulatory activities in their 

review of insurance groups. 

Insurers in a corporate group are required to file consolidated financial statements for their ultimate 

parent. However, these are based on US GAAP, not SAP, and are not required at an intermediate 

insurance holding company level. So they do not allow any group assessment against insurance 

regulatory financial requirements. 

Supervisors have not traditionally looked at internal controls or risk concentrations at group level. 

They are now focusing more on group management and controls in the context of the new approach 

to risk-focused examinations currently being rolled out (see ICPs 9, 10 and 13). Some of the 

internal control requirements applicable to insurance companies may be satisfied by compliance at 

the group level—for example, the requirement for audit committees that takes effect on January 1 

2010 (see ICP 10) recognizes a group audit committee as meeting the requirement. 

As host supervisors in relation to U.S. operations of groups based in other countries, departments 

have been greatly increasing their cooperation with home regulators in the course of the crisis. 

There are regular exchanges of views and information. Departments have sent representatives to 

colleges of supervisors of groups based in Europe with significant U.S. business. International 

colleges of supervisors have met for some, but not for all (or even all the largest) U.S.-based 

insurance groups with international operations. 

A new NAIC working group is considering possible changes to the Holding Company Model Act 

in response to financial crisis lessons and developments internationally. The group is considering 

the need for group wide requirements and improved cross-border communication and coordination 

(both internationally and between states) among supervisors, including supervisors of other 

financial sectors where appropriate. 

Assessment Partly Observed 

Comments The U.S. approach is focused on securing the financial soundness of individual insurance 

companies. While this has not been unusual among insurance regulators internationally, many have 

been supplementing their strong solo company focus with financial and other requirements and 

more supervisory focus applied at group level and U.S. supervisors should do the same. They do 

not currently make an assessment of the financial condition of the whole group of which a licensed 

insurance company is a member. Risk-focused examinations are not yet generally focusing on 

group issues; and supervisory colleges are not meeting for all U.S.-based international groups. 

It is recommended that U.S. supervisors: 

(i) include fuller assessment of the financial condition of the whole group of which a licensed 
 52 

insurance company is a member; this may involve quantitative techniques and practices in use 

internationally; it would improve U.S. insurance regulators’ ability to identify weaknesses in groups 

which may have an impact on the insurers; in the absence of global reserving and solvency 

standards for insurers, this will not be easy to do on an international basis (i.e., for the relatively 

few U.S-based international insurance groups) but may be introduced more readily for domestic 

groups—at least by applying the U.S. RBC requirements to the consolidated domestic insurance 

group balance sheet; 

(ii) extend the risk-focused approach to examinations of solo insurance companies to groups, again 

starting with U.S.-led groups—in effect extending the lead regulator and college of supervisors 

arrangements already in widespread use for such groups within the framework developed by the 

NAIC (a group wide approach to examinations is already being taken in some cases but is not 

standard across the states); and 

(iii) ensure that colleges of supervisors for the U.S.-led groups with major international operations 

are established and functioning effectively—and led by U.S. insurance regulators (existing 

arrangements under which agencies with limited insurance expertise have been designated as global 

lead supervisors have been shown to be inadequate). 

Adding this group wide focus to U.S. insurance regulation will be a significant change, maybe 

equal to that involved in the development of risk-focused examinations. It will require attention to 

skills and training. It may also be desirable for insurance regulators to be given additional powers, 

such as authority to license insurance holding companies, apply capital requirements to the 

consolidated insurance group and direct the insurance holding company to make changes at the 

group level to rectify any shortcomings. 

Prudential Requirements 

Principle 18. Risk assessment and management 

The supervisory authority requires insurers to recognize the range of risks that they face and to 

assess and manage them effectively. 

Description The supervisory authorities do not explicitly require insurers to have comprehensive risk 

management policies and systems in place; however, the insurer’s risks and its systems to measure 

and manage those risks are reviewed through the on-site examination process. 

It is clear from the NAIC Financial Examiners Handbook, from discussions with examination staff 

and from supervisory authority examination work papers that the review of risk assessment and risk 

management systems and controls in insurers is a large component of the examinations. Under the 

new risk-focused examination approach a large range of insurer risks are to be assessed, as well as 

risk mitigation strategies and approaches so that examiners can rate an insurer’s residual risks. 

Assessment Largely Observed 

Comments The relevant laws, regulations or standards should be changed to include a requirement that an 

insurer have in place comprehensive risk management policies and systems capable of promptly 

identifying, measuring, assessing, reporting and controlling their risks. While the desired outcomes 

for this ICP appear to be achieved in practice owing to the comprehensive approach to examination 

of insurers, it is increasingly important that the risk management function of insurers is of high 

quality and given significant focus and influence within insurers. 

Principle 19. Insurance activity 

Since insurance is a risk taking activity, the supervisory authority requires insurers to evaluate and 

manage the risks that they underwrite, in particular through reinsurance, and to have the tools to 

establish an adequate level of premiums. 

Description The supervisory authority does not specifically require in any law or standard that the Board of 

Directors approve and regularly review the insurer’s strategic underwriting and pricing policies. 
 53 

However, it is expected that an insurer has detailed underwriting, pricing, expense and reinsurance 

systems and controls, and these are inspected in some detail during an examination of an insurer. 

The NAIC Financial Examiners Handbook contains guidance on this in its Examination Repository 

(Section 4) which has considerable detailed material on how to examine activities relating to 

premiums, losses and benefits, and reinsurance for each of life, health and property/casualty 

classes. 

While there are variations across states, most states have some review or approval authority over 

policy forms and, in the case of property and casualty insurers, they also often regulate premium 

rates; in some cases, insurers must simply file rates and forms before using them; in other cases, 

both must be approved in advance. In respect to rates, the objective is to ensure that they are not 

inadequate, excessive or unfairly discriminatory to consumers. Through this process there are 

considerable analyses undertaken of an insurer’s proposed pricing for specific products. (See also 

ICP 25). 

Details of all reinsurance contracts must be lodged with the supervisory authority so their degree of 

protection to the ceding insurer can be assessed for its adequacy. Much of this is simply examined 

and the supervisory authority intervenes or withholds approval only if there are concerns. The 

Examiners Handbook has a section (Section 6) dedicated to reinsurance and one of its sub-sections 

(i.e., sub-section VI) provides specific guidance on the evaluation of risk transfer, including the 

cash flow testing evaluation approach. 

Assessment Largely Observed 

Comments The relevant laws or regulations do not explicitly provide that an insurer must have in place 

strategic underwriting and pricing policies approved and reviewed regularly by the Board. Boards 

are not required to set the strategic limits on these core insurance functions within which 

management should operate. There is a risk that the prior notification requirement may lead to 

undue ‘prior approving’ of many reinsurance transactions, which could be an ineffective use of 

supervisory resources. The relevant laws or regulation should be amended to provide that an insurer 

must have in place strategic underwriting and pricing policies approved and reviewed regularly by 

the Board. 

Principle 20. Liabilities 

The supervisory authority requires insurers to comply with standards for establishing adequate 

technical provisions and other liabilities, and making allowance for reinsurance recoverables. The 

supervisory authority has both the authority and the ability to assess the adequacy of the technical 

provisions and to require that these provisions be increased, if necessary. 

Description The NAIC Model Law # 820 Standard Valuation Law (included in the accreditation process) is the 

primary authority for determining adequacy of reserve liabilities for life and accident and health 

insurance companies. This is supported by further regulations and requirements. 

Reserve requirements for property and casualty insurers are outlined in the NAIC Accounting 

Practices and Procedures Manual (APPM—included in the accreditation process). The Annual 

Statement Instructions (ASIs – included in the accreditation process) also require that a Statement 

of Actuarial Opinion (SAO—included in the accreditation process) on an insurer’s reserves is 

provided and that actuarial work on calculating reserves and opining on them is done in accordance 

with Actuarial Standards of Practice (ASOPs). There is also a specific ASOP on data quality. 

The SAO must be supported by a detailed actuarial report, which spells out the particular actuarial 

valuation methodologies used, the actuarial assumptions used and discusses the recent experience 

of the business compared with what was expected. This detail extends down to lines of business, 

and where necessary, even sub-lines of business where it is expected that loss experience may be 

substantially different. 

Reserves have to be calculated both gross and net of reinsurance. 
 54 

For life and health insurance, there is a set minimum standard valuation for most life and health 

insurance products. Generally this is a conservative net premium valuation, so statutory reserves for 

life insurance are mostly highly conservative. As this approach is not entirely satisfactory for more 

complex life products with numerous policyholder options and guarantees (e.g., variable annuities 

with living benefits), the NAIC and the actuarial profession have developed and are continually 

refining more sophisticated statutory reserving approaches (which include asset adequacy 

assessments, cash flow testing and stochastic modeling) for such products, to ensure interest rate 

risks and equity risks in the products are adequately reserved for. These are in addition to the 

overall required actuarial opinion statement mentioned above. 

This work is now leading to a more Principles Based Approach (PBA) for life reserving (not in 

effect at the time of this assessment), but also to adjustment to capital requirements for such 

products. 

For property and casualty insurance, there is not a set minimum standard valuation, rather the 

insurer will set its reserves on advice from its actuary. The actuaries must do their calculations and 

give their advice according to ASOPs. The actuary’s SAO must also state the actuary’s point 

estimate and high and low range for reserves along with the point estimate actually adopted by the 

insurer. Generally property and casualty insurance statutory reserves are determined on an ultimate 

cost basis (i.e., not discounted to produce present values) allowing for claims inflation, including 

‘superimposed inflation’. 

This approach should normally produce conservative reserves for highly predictable lines of 

business. 

Examinations of insurers do cover reserving and the handbook has significant guidance on how 

examiners can check the insurer’s process for determining reserves. 

In carrying out the annual audit the external auditor will usually obtain its own actuarial advice, 

which generally involves the auditor’s actuary reviewing the work of and opinion of the insurer’s 

actuary. 

Actuaries within the supervisory authorities read all the SAOs and the actuarial reports (which the 

insurer must keep available for seven years) if there is a need to. 

If the supervisory authority has any concerns about an insurer’s reserving they can obtain further 

independent actuarial advice on the reserves and ultimately can require the insurer to increase 

reserves to a level which they believe is adequate. 

See also Appendix – Technical Note: Accounting and Actuarial Framework for Insurance. 

Assessment Observed 

Comments The liability reserving methods and bases generally lead to conservative estimates, which is in line 

with the conservative, book value nature of statutory insurance accounting in the United States 

Elements of the reserving methods adopted involve stochastic modeling or scenario analysis 

techniques to estimate the reserves required under moderate adverse conditions. 

However, there is currently no particular or specified safety level which is targeted for reserving—

or capital. For general transparency and for international comparison, it is recommended that 

consideration be given to specifying a target safety level for reserving (and an associated target 

safety level for capital). This should also assist in keeping margins for conservatism in reserves 

more similar across insurance classes and thus assist with peer comparisons of reserving. 
 55 

Principle 21. Investments 

The supervisory authority requires insurers to comply with standards on investment activities. 

These standards include requirements on investment policy, asset mix, valuation, diversification, 

asset-liability matching, and risk management. 

Description Investment activities of insurers are regulated by one of two approaches to achieve diversification, 

namely: 

• defined limits – whereby restrictions are placed on the amount of an insurer’s financial assets 

which can be invested into particular asset classes and lower grade investments. This is 

provided for in the NAIC Model Law #280 Investments of Insurers Model Act (Defined 

Limits Version) (included in the accreditation process); and 

• defined standards – whereby a more principles-based approach is used by requiring the Board 

of an insurer to establish and monitor an investment policy which meets specific criteria. This 

is provided for in the NAIC Model Law #283 Investments of Insurers Model Act (Defined 

Standards Version) (included in the accreditation process). 

Detailed information and statistical data on investments, including data on all individual 

investments held, bought and sold, has to be filed annually and is stored in the NAIC databases. 

This allows for extensive analysis of the investments and investment exposures of an individual 

insurer, as well as the insurance market. 

The Investments of Insurers Model Act (Defined Standards Version) contains requirements for 

insurers to monitor and manage asset/liability positions. Where an insurer is subject to the Defined 

Limits version of the model law, supervisors look for and expect to see these arrangements in place. 

In addition, the Annual Statement is required to include a Management’s Discussion and Analysis 

section, in which liquidity, asset/liability matching and capital resources must be discussed in 

detail. 

Financial examinations of insurers involve detailed scrutiny of insurers’ investment systems, 

reports and controls. The NAIC Financial Condition Examiners Handbook has specific guidance 

for examiners on this. 

The NAIC has established a Securities Valuation Office (SVO) which has expert staff to provide 

specific advice on, and standards for, the valuation of different types of securities. The APPM and 

ASIs require that securities owned by insurers be valued according to the SVO valuation standards. 

Requirements on securities lending, or sale and repurchase arrangements, are contained in the 

NAIC Model Law #280 Investments of Insurers Model Act (Defined Limits Version). Essentially, 

it is allowed up to 40 percent of an insurer’s admitted assets with exposure to any single business 

entity through such transactions limited to 5 percent of admitted assets. Before undertaking such 

transactions an insurer must have a written investment plan for such activity which covers: 

• apart from dollar roll (i.e., short term sell/purchase) transactions, the need for a written 

agreement; 

• how the cash received will be invested; and 

• the operational procedures to be used to manage interest rate risk, counterparty default risk, the 

conditions under which proceeds from reverse repurchase transactions may be used in the 

ordinary course of business and the use of acceptable collateral in a manner that reflects the 

liquidity needs of the transaction. 

See also Appendix – Technical Note: Accounting and Actuarial Framework for Insurance. 
 56 

Assessment Observed 

Comments The regulatory requirements for investments are robust and they are likely to have contributed to 

the limited number of major investment problems for insurers from the financial crisis. As insurers 

move more to the defined standards investment model (i.e., a more principles-based approach), it 

will be important to ensure that all aspects of investment risk, especially asset/liability mismatching 

risks, are well covered in the reserving and capital requirements. 

Principle 22. Derivatives and similar commitments 

The supervisory authority requires insurers to comply with standards on the use of derivatives and 

similar commitments. These standards address restrictions in their use and disclosure requirements, 

as well as internal controls and monitoring of the related positions. 

Description As well as the detailed requirements contained in the two model laws on investments (see ICP 

21), there is a specific NAIC Model Law # 282, Derivative Instruments Model Regulation (which 

is, however, not included in the accreditation process), which sets standards for the prudent use of 

derivative instruments. This regulation contains requirements on: 

• insurer internal guidelines and control procedures—including requiring approval of these by 

the supervisory authority; 

• derivative transaction documentation; and 

• trading requirements. 

The two model laws on investments specifically prohibit the use of derivative instruments for any 

purposes other than hedging or income generation, in which case, derivative investments are 

restricted to covered transactions and limited to a percentage of the insurer’s admitted assets. 

The NAIC Financial Examiners Handbook contains specific guidance on derivatives within its 

guidance on investments. This covers in detail activities that can be undertaken to examine 

derivatives dealing, pricing and valuation, hedge effectiveness, documentation, auditing and 

accounting disclosures. 

The ASIs require detailed reporting of derivative exposures and transactions. 

See also Appendix – Technical Note: Accounting and Actuarial Framework for Insurance. 

Assessment Observed 

Comments The requirements relating to derivatives use are robust and sensible in that they allow derivatives to 

be used for purposes which would enhance an insurer’s investment management and returns 

without exposing it to undue risk of losses. There are no requirements on derivatives use at a 

holding company level outside of an insurer, but this is not required by the ICPs. 

Principle 23. Capital adequacy and solvency 

The supervisory authority requires insurers to comply with the prescribed solvency regime. This 

regime includes capital adequacy requirements and requires suitable forms of capital that enable the 

insurer to absorb significant unforeseen losses. 

Description There has for many years been a set of Risk-Based Capital (RBC) requirements for insurers. RBC 

requirements are covered under the accreditation process. The RBC rules differ between life and 

health insurance and property and casualty insurance. The risks covered by the RBC requirements 

are: 

• life and health 

o asset value risk (essentially credit risk in the assets); 

o insurance risk (essentially adverse experience in the insurance obligations); 
 57 

o interest rate risk (essentially due to changes in interest rates which lead to losses due to 

mismatching of assets and liabilities); and 

o all other business risks. 

• property and casualty insurance 

o asset value risk (essentially credit risk in the assets); 

o credit risk (essentially counterparty risk in reinsurance receivable); 

o underwriting risk (essentially adverse experience in the insurance obligations); and 

o all other business risks. 

An insurer’s risk-based capital is calculated by applying factors to various asset, premium, claim, 

expense and reserve items. The factor is higher for those items with greater underlying risk and 

lower for less risky items. The adequacy of a company’s actual capital can then be measured by a 

comparison to its risk-based capital as determined by the formula. 

Capital and surplus of an insurer is essentially the excess of regulatory admitted assets over 

liabilities. The APPM specifies which assets of an insurer cannot be ‘admitted’ for statutory 

accounting purposes and thus will not count toward capital and surplus. Non-admitted assets 

include intangible type assets which cannot be readily realized in a liquidation; reinsurance which is 

disapproved, from an ‘alien reinsurer’ and not collateralized, or does not meet effective risk transfer 

criteria; investments in excess of regulatory limits. 

Unrealized gains/losses on investments are generally not brought to account, or are deferred by 

mechanisms such as an asset maintenance reserve or interest maintenance reserve for gradual 

release. They are therefore not counted as capital or surplus immediately. Some realized gains and 

losses are treated similarly. 

There is not a classification of capital into tiers as there is for banking. 

As described under ICP 14, there is a formal structure of prompt corrective action levels to ensure 

that the deteriorating financial condition of an insurer is addressed early to help prevent insurer 

failure and loss to policyholders. 

There are no specific or indirect requirements which address inflation of capital. The regulatory 

requirements are heavily structured to ensure tight “ring fencing” of an insurer’s operations and 

total assets (see also ICP 17). 

There are elements of stress testing and other forward-looking analysis built into the reserving and 

capital adequacy frameworks. For example, for asset adequacy testing of the reserves in relation to 

certain product lines, tests must be performed and reported on in the SAO and Memorandum. 

Otherwise, stress tests are performed on an occasional basis but are being used more systematically 

in response to financial crisis. 

See also Appendix I – Technical Note: Accounting and Actuarial Framework for Insurance. 

Assessment Largely Observed 

Comments Insurance company reserves are determined conservatively and the regulatory capital is required in 

addition. So the combination of reserving and capital provides a sizable buffer against adverse 

experience. In the absence of a specified safety level which is targeted for reserving plus capital, it 

is difficult to determine the level of adversity that the combination of reserves and capital can 

cover, but it appears to be commensurate or higher than in many other insurance jurisdictions. 

For general transparency and for international comparison, it is recommended that consideration be 

given to specifying a target safety level for reserving and an associated target safety level for 

capital. This should assist not only with peer comparisons of reserving and capital across insurers, 
 58 

but also comparison against other insurance regimes internationally. Further development of stress 

testing could be considered, using the experience gained from exercises undertaken in the financial 

crisis. 

Markets and consumers 

Principle 24. Intermediaries 

The supervisory authority sets requirements, directly or through the supervision of insurers, for the 

conduct of intermediaries. 

Description Intermediaries are generally referred to as producers in the United States. While distribution 

channels vary, producers may act as agents of one or more insurance company (captive agents or 

independent agents) or as brokers—i.e., acting on behalf of the customer. Banks may also distribute 

insurance products. 

The NAIC’s Producer Licensing Model Act (#218) contains a provision that states must license 

producers, as well as the licensing standards. This law has been implemented in a majority of the 

states but with a relatively high level of significant variations. 

A national system for producer licensing has been contemplated by the U.S. Congress—the 

Gramm-Leach-Bliley Act of 1999 (GLBA) placed a new federal mandate on states to achieve a 

prescribed degree of uniformity, or reciprocity (i.e., mutual recognition), in insurance producer 

licensing within three years or face federal intervention in the form of a federal preemptive 

insurance sales force licensing system, the National Association of Registered Agents and Brokers 

(NARAB). Although unable to meet the “uniform” test, a majority of states adopted the necessary 

laws and reciprocity arrangements to meet the “reciprocity” test, and thus prevented the triggering 

of NARAB. In the effort to promote uniformity, the NAIC has established a process of certification 

of state producer licensing regimes and currently 47 jurisdictions are assessed as meeting the 

reciprocity mandate of the GLBA. 

There is currently legislation before Congress that would revive NARAB. 

All individuals who sell, solicit or negotiate insurance are required by law to be licensed. Both the 

individual and the business entity through which the producer operates must be licensed. Resident 

applicants must pass a test specific to their line of business to ensure a minimal level of 

competency. Some state insurance regulators also require pre-licensing education before a resident 

applicant can sit for an examination. Sixteen states fingerprint their applicants to identify any prior 

criminal activity. (Discussions continue on achieving greater uniformity in this area to address a 

significant obstacle to uniformity in producer agent licensing—states that do extensive vetting of 

prospective licensees, including fingerprint checks are reluctant to grant reciprocity to states with 

weaker requirements.) 

Producers must also obtain a license in each non-resident state where they wish to sell, solicit or 

negotiate insurance (other requirements may also be applied in states which have not adopted the 

reciprocity provisions of the model law). 

Insurance producers who work as agents for one or more companies must, in most states (the model 

law provision is optional), obtain formal appointments with the companies they represent. 

Insurance companies are then required to notify relevant states of each appointment. 

Once licensed, producers must satisfy ongoing continuing education requirements in their resident 

state. They are required to provide appropriate disclosure on the products they sell and their 

potential impact on the consumer if purchased and to assess the needs of their clients and suitability 

of particular products. Under the Unfair Trade Practices Act model law (#880), producers must not 

misrepresent the benefits and conditions of a policy. However, producers are not required to make 

disclosures to customers of the status under which they are doing business, for example whether 

they are independent and which insurance companies have appointed them. 
 59 

Under the model law, state insurance regulators have various powers to address misconduct by 

intermediaries (section 12 of the model law lists types of misconduct). These include suspension or 

revocation of both a resident and non-resident license as well as the levying of fines. In addition, a 

Federal law, 18 U.S.C. 1033, imposes a lifetime ban from the business of insurance for criminal 

whose crime involves dishonesty or breach of trust. 

Departments analyze and respond to consumer (and insurer) complaints about particular agents. 

A license may be suspended or revoked when a producer has misappropriated a client’s money. 

However, states do not generally require an intermediary to have a separate account for the deposit 

of clients’ funds; and there is no NAIC model law provision in this area. Where the producer is 

acting as agent, the legal framework relating to agents provides that monies paid to producers 

acting as the agents of insurers are liabilities of the insurer. Insurers in practice will make customers 

good where agents they have appointed fails to pass on premium payments. 

Some states have adopted their own provisions requiring brokers to establish separate accounts 

(premium trust fund accounts) to be used to hold money that has not yet been paid to insurers or 

which is to be remitted to clients. In many states, agents and brokers have a legal responsibility in 

relation to such funds in a fiduciary capacity—and may be required not to mingle their own and 

client funds. 

Producers are not subject to financial requirements or reporting – although some states impose 

surety bond requirements on individual producers. 

Examinations of producers are not mandated as they are for insurance companies; and departments 

have discretion whether and how often to carry them out (there is no NAIC examination manual for 

producers). Examinations of insurers may extend to producers acting as agents for the insurer, in 

particular where (i) the insurer has appointed one or more managing general agent (MGA) – i.e., 

agents, usually focused on commercial risks, which may have authority from the insurance 

companies who have appointed them to accept business on their behalf and may also handle claims 

or help place reinsurance; and (ii) the producer is a large broker focusing on commercial lines. 

Four major groups of mainly commercial lines brokers are subject to more intensive oversight as a 

result of settlement agreements in 2006 with Attorneys General and regulators in a number of 

states. These arrangements stipulate various business reforms required of these brokers including 

disclosure of commission and a ban on contingent commissions. While discussions continue on a 

general reform of requirements applying to all firms in this area that was envisaged at the time of 

the settlement arrangements with the four major groups, no measures have yet been enacted. While 

there are some provisions on disclosure in the Producer Licensing Model Act (#218) and most 

jurisdictions have some kind of disclosure requirement related to compensation or the role of the 

producer, the limited scope of the 2006 settlement agreements mean that there are not consistent 

commission disclosure requirements applying to brokers across the market. 

All information about producers is stored in a national database. 

Assessment Largely Observed 

Comments While producer regulation is less uniform than that it is for insurance companies, in respect of both 

requirements in law and the supervisory work of departments, most states have at least the core 

requirements—licensing, requirements in relation to producer skills and expertise, and powers to 

undertake examinations and to take action in case of producer misconduct. The general legal 

framework provides safeguards for client money where intermediaries act as agents (and this has 

been tested in numerous cases). There is less uniformity on the safeguards applying to money held 

by brokers but separate accounts with trust status are required in at least two states where large 

commercial lines brokers are domiciled. 
 60 

The major commercial lines brokers (including those with large global presences) are otherwise 

subject to relatively limited supervision, other than that provided for in the 2006 settlement 

arrangements. While these institutions should clearly not be regulated in the same way as major 

insurance companies (because they are not risk carriers), closer oversight would be appropriate to 

reflect the importance of their role in the commercial lines market. 

Some strengthening of the approach to producer regulation is recommended: (i) to extend broker 

trust fund arrangements across states (where not already in place) to ensure that client funds are 

fully protected; (ii) to develop a uniform approach to the regulation of major brokers which reflects 

their important role; and (iii) to complete the current work on a consistent approach to the 

regulation of commission disclosure. 

In addition, producers should be required to make disclosures to customers of the status under 

which they are doing business, including which insurance companies have appointed them. 

Principle 25. Consumer protection 

The supervisory authority sets minimum requirements for insurers and intermediaries in dealing 

with consumers in its jurisdiction, including foreign insurers selling products on a cross-border 

basis. The requirements include provision of timely, complete and relevant information to 

consumers both before a contract is entered into through to the point at which all obligations under 

a contract have been satisfied. 

Description There is an extensive set of provisions and processes aimed at protecting consumers entering into 

insurance contracts. Major elements are: 

• the producer licensing requirements (see ICP 24) – which address point of sale issues, since 

insurance products are mostly distributed through agents and brokers; 

• rate and form regulation: departments exercise at least some review or approval authority over 

policy forms and, in the case of property and casualty insurers, they also often regulate 

premium rates; in some cases, insurers must simply file rates and forms before using them; in 

other cases, both must be approved in advance. In respect to rates, the objective is to ensure 

that they are not inadequate, excessive or unfair to consumers. For certain life insurance, 

annuity, disability and long term care products, a central approval process has been developed 

under the 2006 Interstate Insurance Product Regulation Commission (IIPRC) which 34 states 

have so far joined; 

• requirements in insurance codes applicable to insurance business – drawn from the NAIC 

Unfair Trade Practices Act (#880) and Unfair Claims Settlement Practices Act (#900), 

although implementation is not uniform across states; the requirements focus on the prohibition 

of an extensive list of specific misconduct and of unfair trade and claims practices (see below);

other measures cover issues with particular products—for example, the Suitability in Annuity 

Transactions Model Regulation;

• market conduct examinations which departments undertake on individual companies and 

producers – which cover conduct issues in underwriting, claims handling, marketing and other 

areas (see ICP 13); 

• data collection from insurers on market conduct issues – the NAIC Market Conduct Annual 

Statement (MCAS), introduced in 2004 is used by companies (again, not uniformly across 

states) to report data such as length of time taken to settle claims and replacement rates for 

some product types (persistency); it is used to target market wide responses and examinations; 

and as input to the Market Analysis Working Group (MAWG), a cross-state group of 
 61 

regulators that operates on similar principles to the FAWG; 

• databases to enable departments to record and retrieve information on producers and 

companies—such as the Regulatory Information Retrieval System (RIRS) and the Special 

Activities Database (SAD) which is used to check applicants’ background; 

• direct consumer services, particularly complaints handling but also consumer information and 

consumer education programs. Departments analyze and respond to complaints, taking up 

issues with companies or producers and requiring redress where appropriate. 

In respect of insurance claims handling, states uniformly require insurance claims to be settled in an 

equitable and fair manner. Specific acts are listed as “unfair claims practices,” including knowingly 

misrepresenting relevant facts or policy provisions relating to coverage, not attempting in good 

faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has 

become reasonably clear; and attempting to settle or settling claims for less than the amount that a 

reasonable person would believe the insured or beneficiary was entitled by reference to material 

accompanying an application. 

Insurance regulators may levy civil penalties or take civil action in cases of unfair trade practices. 

In addition, policyholder protection in case of insolvency of an insurance company is provided by 

state guaranty associations covering individual life and health and property and casualty markets in 

each state. The scope and extent of the coverage of these organizations varies across states. With 

limited exceptions, they operate on the basis that insurance companies are assessed for 

contributions to the compensation paid to policyholders of an insolvent institution as payments 

become due. The annual assessment per insurer is capped, in most states at 2 percent of annual 

premium income. To date, actual assessments have been well below the cap. 

 

Assessment Observed 

Comments Departments have been increasing the scope of their consumer protection work in recent years, 

moving away from a traditional focus on financial issues (and handling of consumer complaints) to 

a more proactive approach to market conduct of insurers. Established regulatory tools from the 

financial area, and the model of cooperation and challenge between departments within an NAIC 

framework, have been extended to market conduct—for example in market conduct exams, 

MAWG and the extensive use of shared databases. Departments have tackled collectively some 

significant market conduct abuses at large multistate companies and across the market in respect of 

certain products and practices. 

This transition has further to go, however, particularly in respect of the ability of departments to 

identify and respond quickly to wider market issues as well as problems at individual companies. 

As with producer licensing, there is a marked lack of uniformity across states in the market conduct 

area, both in the requirements adopted by departments (including rate and form approval), and their 

participation in cross-state initiatives such as the IIPRC and MCAS. The absence of accreditation 

standards in this area makes it hard to judge the full impact of these variations, although it is clear 

that they create significant inefficiencies for multistate insurance companies and producers. 

However, as with the approach to producer licensing, core consumer protection requirements are 

apparently in place in most if not all states. 

Principle 26. Information, disclosure & transparency toward the market 

The supervisory authority requires insurers to disclose relevant information on a timely basis in 

order to give stakeholders a clear view of their business activities and financial position and to 

facilitate the understanding of the risks to which they are exposed. 

Description Insurance companies are not subject to any formal requirements from insurance regulators on their 

disclosure of financial or other information. Those which are publicly-traded companies or part of 
 62 

groups headed by such a company are subject to SEC requirements on publication of financial 

statements and other information. 

Stakeholders do, however, have access to information through other means. Financial information 

can be obtained from the NAIC for a fee of US$2 per company by rating agencies and data 

vendors. Policyholders and other stakeholders may also obtain information on individual companies 

from the NAIC free (summary data and full financial statements on up to five companies) or a 

charge (more than five full statements). They can also approach relevant insurance departments 

direct, who make available financial statements direct but also refer enquirers to the NAIC. 

Reports describing the findings of examinations (principally matters of fact rather than examiners’ 

judgments) are also available on departments’ websites. 

Assessment Observed 

Comments While there are no regulatory requirements in relation to disclosure, full financial information, 

including the actuarial opinion and auditor’s statement, are readily available to stakeholders. This 

reflects the relative ease of access and concentration of data that has resulted from financial 

statements being submitted direct to the NAIC. However, to improve the availability of 

information, in particular to policyholders without access to databases, ratings etc, and the 

understanding of insurers’ risks, the NAIC should consider making publicly available for free more 

of the information which is currently subject to charges. The NAIC should consider a review of the 

benefits of developing a set of explicit disclosure requirements. 

 

Principle 27. Fraud 

The supervisory authority requires that insurers and intermediaries take the necessary measures to 

prevent, detect and remedy insurance fraud. 

Description Efforts to combat insurance-related fraud encompass a wide range of state, federal and private 

sector initiatives aimed at criminalizing fraudulent claims and other frauds, and committing 

resources to detect and prosecute cases of fraud. 

The NAIC model law Insurance Fraud Prevention Model Act (#680): 

• sets out a prohibition on insurance fraudulent acts; 

• gives investigative and other powers to the commissioner; 

• establishes mandatory reporting to the regulator; 

• provides for the confidentiality under law of relevant documents and information and for 

information to be shared with other agencies; 

• provides for the creation of fraud prevention units within departments; and 

• requires companies to take antifraud initiatives to detect, prosecute and prevent fraudulent 

insurance acts. 

As at April 2009, all states that had implemented the model had done so with significant variations 

and several had taken no action yet. The model is not covered by accreditation standards. 

There is also some federal legislation, such as measures against fraud in healthcare insurance. 

The model law does not explicitly refer to insurance claims fraud but defines “insurance fraudulent 

act” sufficiently widely (for example, with reference to presentation of false information) to cover 

such fraud. Departments may prosecute those found to have carried out insurance fraudulent acts 

themselves or refer the evidence to law enforcement agencies (for example where the department 
 63 

does not have a prosecutor on its staff). Insurance regulators may levy civil penalties or take civil 

action using powers available in cases of unfair trade practices, where these are relevant. 

Antifraud initiatives required of companies include an antifraud plan, which must be submitted to 

the commissioner. Most insurance companies now have special investigation units (SIUs) to 

identify and investigate suspicious claims. 

Most departments have fraud prevention units (or fraud bureaus), whose function includes initiation 

of independent investigations and reviews of reports or complaints of alleged fraudulent insurance 

activities from federal, state and local law enforcement and regulatory agencies and insurers. Some 

of these fraud bureaus have significant resources in relation to the total available to departments. 

Financial and market conduct examinations are tasked to identify evidence of fraud. Guidance is 

provided to examiners in the NAIC Market Conduct Examiners Handbook. Examiners look at the 

anti-fraud plan and assess the adequacy of the resource commitments (and training) it sets out. The 

overall control framework (including, for example, internal audit), is assessed for its effectiveness 

in controlling against fraud, which is treated as part of operational risk for the purposes of riskfocused reviews (see ICP 13). An exhibit in the handbook sets out how fraud assessments should be 

undertaken and presented. 

The reporting of fraud by insurers to departments must cover external, internal and suspected 

claims fraud. The NAIC provides (for use by consumers as well as insurers) an online system, the 

Online Fraud Reporting System (OFRS). A report made in OFRS is delivered to all states in which 

the relevant insurer does business. 

The National Insurance Crime Bureau (NICB), a not-for-profit organization supported by the 

property and casualty insurance companies, works with insurers and law enforcement agencies to 

facilitate the identification, detection and prosecution of insurance crime. As well as managing 

databases of insurance crime, it organizes training, and promotes public awareness. It also 

undertakes investigations in cooperation with companies and law enforcement agencies. The NICB 

shares suspected fraud claims information with the NAIC who make it available to states. 

 

Regulators have statutory authority to share information regarding investigations, actions and 

examination results with other insurance regulators, other state, federal and international regulatory 

agencies and law enforcement agencies. 

 

Departments maintain relationships with state and federal law enforcement agencies and cooperate 

on investigations. Federal authorities are typically closely involved and are more likely to take the 

lead where there are international issues. 

Assessment Observed 

Comments While approaches vary by state, core requirements (such as making insurance fraud a crime) are in 

place across states. The capacity of departments to address fraud-related issues is increasing as 

market conduct exams are undertaken and the availability of data on fraud improves with the 

development of databases. Remaining gaps in the framework – for example, where departments do 

not require an anti-fraud plan from insurance companies – should be addressed as soon as possible. 
 64 

Anti-money laundering, combating the financing of terrorism 

Principle 28. Anti-money laundering, combating the financing of terrorism (AML/CFT) 

The supervisory authority requires insurers and intermediaries, at a minimum those 

insurers and intermediaries offering life insurance products or other investment related 

insurance, to take effective measures to deter, detect and report money laundering and the 

financing of terrorism consistent with the Recommendations of the Financial Action Task 

Force on Money Laundering (FATF). 

Description Insurance companies are subject to the relevant AML/CFT provisions of the Bank Secrecy Act 

(BSA). 

In 2001, the USA PATRIOT Act amended the BSA to require that all businesses defined as 

financial institutions implement anti-money laundering (AML) programs. Insurers subject to the 

Act, including life insurance companies and other investment related insurers, are now required to 

comply with the provisions of the BSA, in particular, the AML program and suspicious activity 

reporting (SAR) provisions in respect to relevant business. The Financial Crimes Enforcement 

Network (FinCEN), a bureau of the U.S. Department of the Treasury, is responsible for the 

administration of the BSA and AML activities. The Internal Revenue Service (IRS) is the delegated 

examination authority for the insurance sector. FinCEN retains enforcement authority, including 

referral of cases to criminal law enforcement agencies. 

In 2005, the U.S. Treasury Department issued implementation rules as required under the amended 

BSA. The “Financial Crimes Enforcement Network; Amendment to the Bank Secrecy Act 

Regulations – Anti-Money Laundering Programs for Insurance Companies” (31 CFR 103.137) 

apply only to those insurance companies offering covered products. Covered products include: 

• a permanent life insurance policy, other than a group insurance policy; 

• any annuity contract, other than a group annuity; and 

• any other insurance product with features of cash value or investment. 

Since these requirements took effect in May 2006, each insurance company issuing or underwriting 

a covered product has had to develop and implement an anti-money laundering program reasonably 

designed to prevent the insurance company from being used to facilitate money laundering or the 

financing of terrorist activities. The insurer’s program has to cover only the insurer’s covered 

products. Key requirements are: 

• The program must incorporate policies, procedures, and internal controls based upon the 

insurance company’s assessment of the money laundering and terrorist financing risks 

associated with its covered products. 

• The insurer is required to integrate the company’s agents and brokers into its anti-money 

laundering program. Insurance agents and brokers themselves are not required to have separate 

anti-money laundering programs. However, the insurer is responsible for monitoring 

compliance by the company’s agents and brokers with their obligations under the anti-money 

laundering program. (Certain insurance products fall within the definition of securities under 

the Securities Exchange Act and may only be sold by registered broker dealers who are subject 

to the separate anti-money laundering requirements of their regulators). 

• The insurance company must designate a compliance officer to be responsible for 

implementing and monitoring compliance of its anti-money laundering program including its 

agents and brokers. 

• The insurance company must provide training for appropriate persons. 
 65 

• The insurance company must provide for independent testing of the program on a periodic 

basis to ensure that it complies with the requirements of the rule. 

• The program must be in writing and be approved by senior management. The written program 

must be made available to the Department of the Treasury, FinCEN, or their designee upon 

request. 

The expectation of the authorities (see the supplementary information published with FinCEN 

Regulations in the Federal Register, November 3, 2005) is that policies and procedures adopted by 

insurance companies in their anti-money laundering and suspicious activity reporting programs will 

provide for obtaining all relevant customer-related information and appropriate assessment of 

customers and customer-related information (although the regulations do not explicitly refer to 

“customer due diligence”). In addition, the U.S. risk-based system requires enhanced measures with 

respect to higher-risk customers, and the general AML record-keeping requirements apply. 

A limited number of anti-money laundering examinations have been conducted by the IRS under an 

MOU with FinCEN since 2007. These have covered insurance companies’ processes in relation to 

agents and brokers. Results have been shared with FinCEN. There have been no cases taken 

forward for enforcement action as yet. Foreign branches and subsidiaries are not examined. 

In parallel with further development of the IRS examination program, FinCEN and the IRS are now 

cooperating with the NAIC and state insurance departments on the development of procedures and 

information-sharing arrangements (MOUs). This may in due course result in the state regulators 

covering BSA anti-money laundering issues more fully in their examinations. At present, state 

regulators in their examinations determine whether insurers have established an anti-money 

laundering program that has been approved by senior management and contains the required 

elements. (Insurance departments may also look at how the company’s compliance function takes 

account of money laundering risks.) If the examiner determines that the company has not 

established or is not maintaining such an anti-money laundering program, then they have the 

authority to refer this information to the appropriate federal authorities. 

The NAIC has formed a subgroup to discuss a number of issues with FinCEN, including review of 

the examination handbook, possible educational assistance and consideration of examination 

collaboration. 

Insurance companies also have to file reports in appropriate situations of the receipt of currency 

over US$10,000. This is in lieu of a requirement to file Currency Transaction Reports. They also 

have to make Suspicious Activity Reports as part of their anti-money laundering program. FinCEN 

has issued guidance on possible suspicious activity, including the purchase of an insurance product 

inconsistent with the customer's needs; unusual payment methods, such as cash, cash equivalents, 

or structured monetary instruments; and early termination of a product (including during the "free 

look" period), especially where it results in a cost to the customer. 

FATF Mutual Evaluation Report (MER), published in June 2006, identified various issues in the 

insurance area, in part relating to the division of responsibilities between the federal and state 

levels. They were regarded by the evaluators as significant weaknesses in the overall context of the 

2006 AML/CFT evaluation. The relevant weaknesses identified were: 

• Obligations to identify beneficial owners are limited to specific circumstances, such as 

correspondent banking and private banking for non-U.S. clients, and do not extend to insurance 

business. 
 66 

• There are no measures in place to ensure that there is adequate, timely and accurate 

information on the beneficial ownership and control of legal persons that can be obtained or 

accessed in a timely fashion by the competent authorities. 

• No explicit obligation to conduct ongoing due diligence, except in certain defined 

circumstances. 

• Customer identification for occasional transactions limited to cash deals only. 

• No requirement for life insurers issuing covered insurance products to verify and establish the 

true identity of the customer (except for those insurance products that fall within the definition 

of a ‘security’ under the federal securities laws). 

• Verification of identity until after the establishment of the business relationship is not limited 

to circumstance where it is essential not to interrupt the normal course of business. 

• No explicit obligation to terminate relationship if verification process cannot be accomplished. 

• The existence of a US$5000 threshold for reporting suspicious activity (too high). 

• Measures relating to politically-exposed persons (PEPs) do not explicitly apply to the 

insurance sector. 

• No explicit requirement requiring life insurers to have policies and procedures for non-face-toface business relationships and transactions; 

• There is no obligation under BSA for financial institutions to implement employee screening 

procedures. 

• For introduced business, no obligation on relying institution to obtain identification/verification 

information from introducer. 

• For insurance, no specific requirement to establish and retain (for five years) all of the written 

records set out in the FATF Recommendations; life insurers of covered products are only 

required to keep limited records of SARs, Form 8300s, their AML Program and related 

documents. 

• In the insurance sector, there is no specific requirement to establish and retain written records 

of transactions with persons from/in countries that do not or insufficiently apply the FATF 

Recommendations. 

In addition, at a number of points in the evaluation report, it was noted that “the effectiveness of 

applicable measures in the insurance sector (which went into force on May 2, 2006) cannot yet be 

assessed.” Published updates provided to the FATF by the U.S. authorities do not provide 

additional information on implementation. 

State insurance fraud bureaus have access to the Federal Bureau of Investigation Law Enforcement 

On-Line (LEO) website. This website contains training information related to a number of topics, 

including AML. Through LEO, the state insurance fraud bureaus facilitate inquiries regarding 

suspicious activities with life insurance policies in death or missing person cases. State insurance 

fraud bureaus work closely with the federal government when suspected money laundering 

activities are discovered. Both state and federal regulators have the authority to cooperate and share 

information relating to AML investigations. 

 

Assessment Partly Observed 
 67 

Comments While money-laundering in connection with insurance has long been a criminal offence, the U.S. 

authorities have only recently brought relevant insurance business within the scope of anti-money 

laundering regulatory requirements (the Bank Secrecy Act). Implementing the approach has taken 

time, partly because of the careful consideration that has been given to the anti-money laundering 

risks in insurance. There were significant gaps in the framework when the most recent FATF MER 

was undertaken in 2006, particularly the absence of specific requirements in relation to customer 

information, while planned federal examinations had not then started. 

The IRS is now carrying out examinations. As its resources available for examinations are limited, 

it is cooperating with state insurance departments to make use of their expertise in this area. 

However, the effectiveness of cooperation between state and federal regulators is limited pending 

the consideration of legal issues arising from their collaboration and agreement of new procedures 

and information sharing arrangements. Both the federal government and state insurance 

departments wish to increase information sharing of examination information. This work has been 

given a high priority by the federal and state agencies but no deadline as yet. 

The regulatory approach also remains heavily reliant on requirements for insurance companies to 

include key processes, including customer due diligence, in anti-money laundering programs. 

It is recommended that a timetable is set for the agreement and implementation of new 

arrangements between state insurance departments and federal authorities that will deliver greater 

resourcing of supervisory activities as well as necessary information exchange. 

(A factual update on developments since the 2006 FATF work is being undertaken separately as 

part of the FSAP work.) 
APPENDIX I: TECHNICAL NOTE ON ACCOUNTING AND ACTUARIAL FRAMEWORK FOR 

INSURANCE

Introduction 

There is a well established and comprehensive framework of accounting and related actuarial 

requirements, which supports insurance regulation. While it is heavily rules-based, it is 

beginning to move toward more of a principles-based approach. 

Regulatory insurance accounting is driven by the NAIC-established Statutory Accounting 

Principles (SAP), which are contained and elaborated on in the NAIC Accounting Practices 

and Procedures Manual – March 2009 (APPM), which in turn utilizes the framework of 

Generally Accepted Accounting Principles (GAAP) established by the United States 

Financial Accounting Standards Board (FASB). However, GAAP pronouncements do not 

become part of the SAP until and unless they are specifically adopted by the NAIC. 

SAP vs. GAAP 

While GAAP is designed to meet the varying needs of the different users of financial 

statements, SAP is specifically designed to address the concerns of regulators. Therefore, 

SAP stresses the ability to pay insurance claims in the future, while GAAP stresses the 

measurement of emerging earnings of a business from period to period (i.e., matching 

revenue to expenses). Put another way, SAP is balance sheet driven, whereas GAAP is 

performance statement driven. 

As regards measurement, SAP is conservative in some respects, but not unreasonably 

conservative over the span of economic cycles. Areas where the differences between SAP 

and GAAP are most evident are: 

• Policy Reserves – statutory policy reserves are intentionally established on a 

conservative basis, emphasizing the long-term nature of the liabilities. Under GAAP, the 

experience expected by each company, with provision for the risk of adverse deviation, is 

used to determine the reserves it will establish for its policies. GAAP reserves may be 

more or less than the statutory policy reserves. 

• Assets – GAAP has recognized certain assets which, for statutory purposes, have been 

either non-admitted or immediately expensed. Policy acquisition costs are expensed as 

incurred under SAP since the funds so expended are no longer available to pay future 

liabilities. Insurance company financial statements prepared in accordance with GAAP 

defer costs incurred in the acquisition of new business and amortize them over the 

premium recognition period. 

• Deferred Income Tax Assets – historically these have not been recognized under SAP. 
69 

• Reinsurance – the methods of accounting for certain aspects of reinsurance under GAAP 

may have varied from SAP (e.g., credit for reinsurance in unauthorized companies is not 

given under SAP). 

APPM 

The NAIC’s APPM is a codification of all of the insurance regulatory accounting 

requirements and it incorporates much other material. It is maintained by the NAIC 

Accounting Practices and Procedures Task Force (APPTF), but the promulgation of new 

SAP guidance by the NAIC ultimately requires adoption by the NAIC membership. The 

APPTF employs two working groups with distinctly different functions to carry out the 

maintenance. The Statutory Accounting Principles Working Group (SAPWG) has the 

exclusive responsibility of developing and proposing new Statements of Statutory 

Accounting Principles (SSAPs). The Emerging Accounting Issues Working Group (EAIWG) 

responds to questions of application, interpretation, and clarification that are generally much 

narrower in scope than development of a new SSAP. 

Concepts 

The following concepts provide a framework to guide the NAIC in the continued 

development and maintenance of the SAP: 

• Conservatism – statutory accounting should be reasonably conservative over the span of 

economic cycles and valuation procedures should, to the extent possible, prevent sharp 

fluctuations in surplus; 

• Consistency – meaningful, comparable financial information to determine an insurer’s 

financial condition requires consistency in the development and application of statutory 

accounting principles; 

• Recognition

3⁄4 Assets having economic value other than those which can be used to fulfill 

policyholder obligations, or those assets which are unavailable due to 

encumbrances or other third party interests should not be recognized on the 

balance sheet but rather should be charged against surplus when acquired or when 

availability otherwise becomes questionable; 

3⁄4 Liabilities require recognition as they are incurred; and 

3⁄4 Revenue should be recognized only as the earnings process of the underlying 

underwriting or investment business is completed. 
70 

Structure of APPM 

The manual is large (about 3,500 pages), has some duplication, shows signs of much 

evolution and addition, and is thus in need of an overhaul to improve readability and 

navigation. However, it is comprehensive and thorough. The main elements to its structure 

are: 

• SSAPs – the primary accounting practices and procedures promulgated by the NAIC; 

these are contained in the body of the APPM; 

• Guidance for specific SSAPs – contained in APPM Appendix A; 

• Interpretations of the EAIWG – contained in APPM Appendix B; 

• Actuarial guidelines – contained in APPM Appendix C (NB these are only for business 

written in life and health insurers); 

• GAAP cross-reference to SAP – contained in APPM Appendix D; 

• Issues papers – usually the first step in developing new SSAPs and contain a 

recommended conclusion, discussion and relevant literature section; contained in APPM 

Appendix E; 

• Policy statements – these are for information only as they relate to the process of 

maintaining and updating the APPM; so they are not accounting requirements or 

guidance; contained in APPM Appendix F; and 

• Audit implementation guide – to supplement the NAIC Annual Financial Reporting 

Model Regulation related to auditor independence, corporate governance and internal 

control over financial reporting, which is proposed to become effective in 2010. 

Hierarchy of APPM elements 

The following is the specified hierarchy of how the various elements of the APPM are to be 

applied: 

• Level 1 - Statements of Statutory Accounting Principles (SSAPs)—the primary 

accounting practices and procedures promulgated by the NAIC, which are generally the 

result of issue papers that have been exposed for public comment and finalized. If 

differences exist between an underlying issue paper and the resultant SSAP the SSAP 
71 

prevails and shall be considered definitive. Also includes specific GAAP material7

adopted by the NAIC, namely:

3⁄4 Category a – FASB Statements and Interpretations, FASB Staff Positions, APB 

Opinions, AICPA Accounting Research Bulletins;

3⁄4 Category b – FASB Technical Bulletins, AICPA Industry Audit and Accounting 

Guidelines, AICPA Statements of Position; and

3⁄4 Category c – Consensus positions of the FASB Emerging Issues Task Force, AICPA 

Practice Bulletins;

• Level 2 - Consensus positions of the NAIC EAIWG;

• Level 3 - NAIC Annual Statement Instructions (ASI);

• Level 4 - NAIC Statutory Accounting Principles Statement of Concepts; and

• Level 5 - GAAP reference material below Category c in the GAAP Hierarchy.

Annual Statement Instructions (ASIs) 

The NAIC issues ASIs for annual statements, which insurers must file with the NAIC, and 

which are available to all States through the NAIC’s databases and systems. There are 

separate ASIs for each category of insurer or insurance business undertaken (i.e., life, health, 

property and casualty, fraternal, title). The type of the information and data to be provided is 

specified in detail in each ASI and the appropriate format for filing the annual statement data 

with the states and the NAIC is provided in the Annual Statement Blanks (Blanks). The ASIs 

specify how the Blanks are to be signed, the state insurance authority specifies which 

directors, officers and trustees are required to sign, and the Blanks require signing individuals 

to attest to the accuracy of the statements. 

The type of information and data to be filed is: 

• Actuarial Opinion—this is in relation to the insurance reserves (see below for more 

details); 

• Annual Audited Financial Reports—there must an annual audit by an independent 

certified public accountant and an audited financial report must be filed as a supplement 

to the annual statement (see below for more details of audit); 

 

7

 FASB has recently completed a major 5-year project of Accounting Standards CodificationTM resulting in the Codification, 

which from 1 July 2009 is the single source of authoritative nongovernmental U.S. generally accepted accounting principles 

and replaces all previous U.S. GAAP standards. The NAIC APPM does not yet reflect this.
72 

• Management’s Discussion and Analysis—this must discuss the reporting entity’s 

financial condition, changes in financial condition and results of operations in order to 

assist regulators properly understand and assess the insurer’s financial condition. The 

items required to be covered include: 

3⁄4 material historical developments; 

3⁄4 explanation of operating performance, including long term trends; 

3⁄4 prospective information, especially that which is likely to have a material impact on 

the insurer’s business volumes, net income and surplus; 

3⁄4 reasons for material changes in line items; 

3⁄4 liquidity, asset/liability matching and capital resources; 

3⁄4 loss reserves (property & casualty only); 

3⁄4 off-balance sheet arrangements; 

3⁄4 participation in high-yielding, highly-leveraged or non-investment grade transactions 

or investments; and 

3⁄4 preliminary merger and acquisition negotiations. 

• Financial Statement—usual items (assets, liabilities, surplus/capital, operating statement, 

cash flow statement), but also detailed analyses, exhibits or notes (which vary by 

category of business), such as: 

3⁄4 breakdowns by line of business; 

3⁄4 breakdowns of major line items (e.g., expenses, premiums, reinsurance); 

3⁄4 changes in reserves; 

3⁄4 non-admitted assets; and 

3⁄4 five-year historical data. 

• Investment Schedules—these cover summary information by asset class, but also detailed 

of the individual assets currently owned, acquired and/or disposed of during the year; and 

• Annual Supplements—some are for all categories of business and some are specifically 

only for one category; 

3⁄4 director and senior officer compensation (i.e., total compensation for each such 

individual)—all categories; 
73 

3⁄4 allocation of insurance expenses to lines of business (to assist in assessing 

profitability by line of business)—all categories, 

3⁄4 investment risk interrogatories (to assist in identifying and analyzing the risks 

inherent in the entity’s investment portfolio)—all categories; 

3⁄4 various claims experience analyses for specific lines of business; and 

3⁄4 actuarial opinion certificates. 

These ASIs are almost identical across the categories of insurance business, but do contain 

some variations in the detail in the financial statements and annual supplements. 

Actuarial requirements 

Statements of Actuarial Opinion (SAO) and Actuarial Memorandum 

In all categories of insurance business the insurer must obtain, and file as part of its annual 

statement, a Statement of Actuarial Opinion (SAO) by a qualified actuary on the insurance 

reserves. The precise form of the SAO varies by category of insurance, but includes: 

• the identification of the actuary providing the opinion; 

• which reserves are covered by the opinion; 

• any reliance the actuary has placed on others in forming the opinion; 

• the actuary’s opinion on if the reserves: 

3⁄4 meet the requirement of the insurance laws; 

3⁄4 are computed in accordance with accepted actuarial standards and principles; 

3⁄4 make a reasonable provision for all insurance obligations of the insurer; and 

3⁄4 the adequacy of a life or health insurer’s reserves and other liabilities in light of 

supporting assets and under moderately adverse conditions—a number of asset 

adequacy analysis methods are available to, and used by, actuaries. The most 

widely used method is cash flow testing. 

• relevant comments by the actuary (e.g., material assumption changes, risk of material 

adverse deviation). 

The SAO needs to be supported by some form of actuarial report and work papers (often 

described as the “Actuarial Memorandum”). The Actuarial Memorandum should provide 

sufficient narrative detail to clearly explain to company management, the regulator, or other 

authority the findings, recommendations and conclusions, as well as their significance. It 

should also provide sufficient technical documentation and disclosure for another actuary 
74 

practicing in the same field to evaluate the work. This technical component must show the 

analysis from the basic data to the conclusions. 

Both the SAO and Actuarial Memorandum must be consistent with the appropriate Actuarial 

Standards of Practice (ASOPs) issued by the Actuarial Standards Board (ASB),8

 and any 

other relevant standards or principles issued by the relevant actuarial professional body.9

The SAO is publicly available, but the Actuarial Memorandum is confidential, and thus only 

available for regulatory examination. 

Qualified Actuary 

A qualified actuary generally needs to be a member in good standing of the American 

Academy of Actuaries (AAA) or a person recognized by the AAA as qualified for such an 

actuarial valuation. For property and casualty business the qualified actuary can be a member 

in good standing of the Casualty Actuarial Society. Qualified actuaries must also meet 

requirements related to their experience in working on such actuarial valuations, under the 

review of other qualified actuaries. 

Appointment of and reporting by the qualified actuary 

The qualified actuary must be appointed by the insurer’s Board of Directors, or its 

equivalent, or by a committee of the Board and the NAIC must be notified each year of the 

qualified actuary which the insurer will be using for its categories of insurance business. If a 

qualified actuary is replaced the insurer must urgently notify the insurance regulatory 

authority, including stating if there have been any disagreements with the previous qualified 

actuary over the preceding two years, The insurer must also in writing request the previous 

qualified actuary to provide a letter to the insurer stating if the actuary agrees with the 

insurer’s statement, or not, and then provide the actuary’s response letter to the insurance 

regulatory authority. 

When there is a change of qualified actuary, the incoming qualified actuary would generally 

consult with the previous qualified actuary, and the code of conduct of the AAA requires the 

previous qualified actuary to cooperate. 

 

8

 The ASB establishes and improves Actuarial Standards of Practice (ASOPs), which identify what the actuary should 

consider, document, and disclose when performing an actuarial assignment. Members of the ASB are appointed by the 

presidents and presidents-elect of the various U.S. actuarial bodies. 

9

 These are the American Academy of Actuaries, the American Society of Pension Professionals and Actuaries, the Casualty 

Actuarial Society, the Conference of Consulting Actuaries, and the Society of Actuaries.
75 

The qualified actuary must report to the Board of Directors or the audit committee each year 

on the items within the scope of the SAO. The SAO and the Actuarial Memorandum must be 

made available to the Board of Directors. The minutes of the Board of Directors should 

indicate that the qualified actuary has presented such information to the Board or the audit 

committee and that the SAO and the Actuarial Memorandum were made available. 

Actuarial Discipline 

The Actuarial Board for Counseling and Discipline (ABCD) was established by the U.S. 

actuarial bodies to strengthen members' adherence to the recognized standards of ethical and 

professional conduct. The ABCD has two primary functions: it responds to actuaries' request 

for guidance on professional issues, and it considers complaints about possible violations of 

the actuarial Code(s) of Professional Conduct. The ABCD is authorized to counsel actuaries 

concerning their professional activities and to recommend to the relevant actuarial body any 

disciplinary action. 

Legal authority 

NAIC Model Law #205 Annual Financial Reporting Model Regulation (Law #205) in 

Section 5 requires that the annual audited financial report shall report the financial position of 

the insurer as of the end of the most recent calendar year and the results of its operations, 

cash flows and changes in capital and surplus for the year then ended in conformity with 

statutory accounting practices prescribed, or otherwise permitted, by the department of 

insurance of the state of domicile. The annual audited financial report shall include the 

following: 

A. Report of independent certified public accountant. 

B. Balance sheet reporting—admitted assets, liabilities, capital and surplus. 

C. Statement of operations. 

D. Statement of cash flow. 

E. Statement of changes in capital and surplus. 

F. Notes to financial statements. These notes shall be those required by the appropriate 

ASIs and the APPM. The notes shall include a reconciliation of differences, if any, 

between the audited statutory financial statements and the annual statement filed with 

a written description of the nature of these differences. 

G. The financial statements included in the audited financial report shall be prepared in a 

form and using language and groupings substantially the same as the relevant sections 
76 

of the annual statement of the insurer filed with the commissioner, and the financial 

statement shall include comparatives. 

Through Law #5, the SSAPs and all the detailed requirements of the APPM, as well as the 

ASIs obtain their legal authority. All 50 states and the District of Columbia have adopted this 

model law. 

Life and health insurers are required by NAIC Model Law #820 Standard Valuation Law to 

value reserves for the liabilities for all their outstanding insurance policies. It specifies 

valuation methods and minimum standards for the computation of the reserves. It, along with 

NAIC Model Law #822 Actuarial Opinion and Memorandum Regulation, requires a SAO to 

be submitted as part of the annual statement of an insurer, and it specifies the substance and 

the form of the SAO. These SAO requirements are also contained in the life ASI. 

For property and casualty insurers a number of SSAPs10 specify for various types of business 

and types of reserves how the reserves should be calculated. They obtain their legal authority 

through Law #205. The SAO requirements in relation to property and casualty reserves are 

contained in the property and casualty ASI. 

Move to a principles-based approach (PBA) 

Legislation on the calculation of insurance reserves began in the United States in the 1850s. 

It covered only life insurance contracts and the initial commissioner chose a net level 

premium reserve method using a specified mortality table for expected death claims and 

specified interest rate for discounting future cash outflows and inflows. For life and health 

insurance, there has been little change over the last 150 years. So for traditional life and 

health insurance contracts the minimum reserve is still based on a formula approach with 

prescribed mortality and interest rates, although mortality varies by type of product and 

interest rate varies by year of issue. No actuarial judgment is allowed in determining the 

minimum reserves. The prescribed actuarial assumptions are mostly conservative leading to 

conservative reserves. Generally, minimum reserve standards have been established to be 

sufficient to cover future claims 75 percent-85 percent of the time.11 In the 1990s an asset 

adequacy analysis test was added to the required SAO to test the adequacy of the formulaic 

reserves in the light of the supporting assets. 

The formula-based system for calculating reserves relies on a static formula that may not 

capture all the risks of the contract. It is slow to respond to new and complex products or 

economic developments. It follows a ‘one size fits all’ approach, thereby restricting the use 

 

10 SSAPs 5, 53, 55, 57, 58, 60, 62, and 65.

11 AAA presentation: Introduction to Principles –Based Approach to life reserves and capital – September 2009.
77 

of actuarial judgment to incorporate the insurer’s risk profile. Ideally the reserving and 

capital requirements need to take account of the insurer’s actual product and business 

practice risks. 

The first steps toward principle-based capital standards were C–3 Phase I (addressed interest 

rate risk in fixed annuities) in 2000 and C–3 Phase II (addressed interest rate and equity risk 

in variable annuities) in 2005. The first step toward principle-based reserves was VA 

CARVM (variable annuity Commissioner’s annuity reserve valuation methods) in 2008 

which is a framework of insurer-specific calculation for variable annuity reserves. 

A principles-based approach can better allow for the insurer’s ‘tail’ risks, where low 

probability events can have large adverse impact. It is generally more in line with how an 

insurer designs and prices its products, manages its investments, and internally reports and 

manages its performance and exposures. It is similar to using internal models for reserving 

and capital. So it involves identifying risks, generating economic scenarios, designing risk 

models, determining assumptions with appropriate margins, running models to do sensitivity 

testing of material risks, and documenting the results and processes. Using this approach to 

determine reserves and capital also requires a determination of the probability of sufficiency 

or safety desired in the level of desired reserving and the level of desired capital. 

The project underway to develop the PBA for life insurance is part of the solvency 

modernization initiative of the NAIC, but involves considerable input from the U.S. actuarial 

profession. The approach to this project is to modify the standard valuation law to enable 

principles-based reserving to be used, by referring to a valuation manual which can then be 

amended as needed by the NAIC. The valuation manual would include detailed reserving 

requirements, will be implemented in phases and apply only to specific products. It will also 

be necessary to develop principles-based capital requirements to mesh with the principlesbased reserving requirements. The principles-based capital requirements will also be 

developed in phases by risk type and product, commencing with interest rate mismatch and 

equity risk (C–3). 

The basic framework for what will be developed is that the reserve will be the greater of a 

deterministic component and a stochastically derived component. The deterministic 

component will use a single economic scenario and acts as a floor under the stochastic 

component. The stochastic component will allow the reserving to be more closely related to 

each product’s risks, it will be determined using multiple economic scenarios to capture tail 

risk and the reserve level will be targeted at a conditional tail expectation of 70 percent (i.e., 

the reserve amount is that needed to meet payouts from the average of the highest 30 percent 

of the economic scenario results). 

It will also be necessary to adjust the capital requirements to mesh well with the new 

reserving requirements. Initially only the C3 capital requirement will be adjusted for those 
78 

products for which PBA reserving will apply. The capital requirement will be determined 

stochastically and the statutory reserves plus capital will be targeted at a conditional tail 

expectation of 90 percent.