Regulator’s view: Earlier due diligence is critical for riskier investments

Commissioner DJ Bettencourt and Douglas Bartlett, Director of Financial Regulation, New Hampshire Insurance Department, share their thoughts on regulatory due diligence for investments.

Copy Of Copy Of FO Black 1200 (108) @NHID.
Bettencourt (L) and Bartlett (R) from the New Hampshire Insurance Department.

Andrew Putwain: What are the top challenges you face in monitoring insurers’ investment portfolios, and how do you maintain positive relationships throughout this process?

DJ Bettencourt: When addressing relationships, we take a collaborative approach because we are a small state; New Hampshire represents less than one-half of 1% of all the total written premium in the US.

"Our financial analysis team reviews [and monitors] changes to our
domestic insurance investment portfolio."

We're going to do the things that we need to do to protect consumers, which are dictated to us by our state statutes, our rules, and the requirements of the National Association of Insurance Commissioners (NAIC), but we do bring a common-sense collaborative approach because we need the companies a lot more than they need us.

In terms of the challenges, our financial analysis team reviews any changes to our domestic insurance investment portfolio and monitors any significant changes in unrealised capital gains and losses – which includes any other than temporary impairment of investments.

We also require our domestics to follow the rules of the NAIC’s Securities Valuation Office and get notices quarterly from the NAIC of any securities that the company has acquired that haven't been filed with them.

Andrew: How are you addressing solvency concerns and issues around capital allocation in the current market?

DJ: When addressing solvency concerns, our financial analysis team monitors our domestic insurers risk-based capital on a quarterly basis. We're getting that regular intake of information and seeing how things are going – for example, if an insurer is approaching 200%, which would mean action is required and the warning light might start blinking.

If this happens, we contact them to see if we need to get involved, but we try to get involved well before that 200% marker. We aim to not let it get to that crisis point.

For some of our health insurers that are owned by large insurance groups, we get parental guarantees to maintain that they have an adequate surplus.

Andrew: When you say that you go in early, is there a defined process that you follow to monitor any changes from the beginning?

Doug Bartlett: This is trend analysis. Let's say you have about 400, and in one year a company has dropped 100 points. While you're trending, it's okay, but if you're losing this money how do we know you're not going to lose another 100 next year?

The process we use is this: if we see a drop below 300 we start to monitor it, which gives us plenty of time to help. It's rare, but companies do drop below that.

These are most of the time well-run companies, and there is capital within the holding company to keep the risk-based capital at 300. 

"This gives us a good understanding of the broad array of the investments
and what investments we want to keep a little bit of a closer eye on."

Now, this is the process for our domestics. We have 57 companies in New Hampshire, and we expect other states to do the same thing with those parented outside our state and to be monitoring this in the same way: everybody on board with the accreditation process.

DJ: The accreditation process is wonderful in the sense that once we know that everybody's in comportment with the NAIC guidelines, we can have full faith that the information they're giving us we can rely on and vice versa.

Andrew: What are the trends you’re currently seeing in insurance investment allocation – and how have bank failures, rate hikes, and ongoing inflation affected investment selection and regulation processes?

DJ: Some of our domestic insurers have portions of their portfolios that might have more risk to them. In those instances, we monitor those investments through the NAIC insight reports that classify investments by risk class.

The NAIC has put in the work, and they're constantly updating that to classify those types of risks. This gives us a good understanding of the broad array of the investments and what investments we want to keep a little bit of a closer eye on.

Andrew: What is your approach to market regulation in 2024, and are there any policy or legislative changes you’re focused on?

DJ: The Department must perform financial examinations of each domestic at least once every five years.  Also, the New Hampshire Insurance Department has a tradition of focusing examinations in a targeted way. Doug and his team pick a specific issue they want to examine, and they look at that issue.

How we deal with certain market conduct issues is different from some of our other units, which take a targeted analysis of companies. So, for instance, our P&C division takes targeted ones while our life and health division takes more full scope, fuller-market conduct exams.

"We represent a small percentage of the market, and we need to reinforce
compliance with the issues that are specifically important to us."

It's the nature of the type of product that you're looking at. They look at issues either new to New Hampshire or New Hampshire-specific. If there are issues going on in other states the NAIC will send out those exam reports from those other states; we can take a look and see how applicable they are to us.

We represent a very small percentage of the market, and we need to reinforce knowledge and compliance with the issues that are specifically important to us and our market. In the new year, we will look at legislation on consumer guarantee contracts both from a forms and conduct perspective to help ensure that quality products are in the market. Our intention is not to block; it’s to assure and weed out products that are fraudulent or marketed in an untoward manner.

We're also going to be examining our workers’ compensation assigned risk carriers as we do every three years. So, we’ll start the process of picking the carriers that will handle the Workmen's Compensation assigned risk pool during the next three-year cycle. That's a normal part of our process. Our workers’ compensation area has been a huge success in recent years. We made some legislative changes a few years ago which have made workers’ compensation much more affordable.

Andrew: Are there any misconceptions around the regulator/insurance investment team relationship you wish to ‘debunk’ and why?

DJ: My philosophy as Commissioner is that we always want to be proactive. We want to address the problem when it is small and manageable – and when we have a range of available options.

If you allow the problem to snowball into a crisis, your range of options narrows and you’re putting out fires. We always encourage the companies to be proactive, and we tell them we want to be a partner; we don't want it to be a punitive process.

That being said, if the company is not making us aware of problems, it’s going to be a different story. I have a legal education, and one of the things they tell you in law school is when you've made a mistake it’s always beneficial for you to come forward and self-disclose.

This is the same philosophy I have with companies. If they've made a mistake and come forward and tell us they messed up but want to make it right, we’ll work with that company. We’ll be more understanding than if we discovered the issue or uncovered an attempt to hide information.

Rewarding good behaviour and discouraging bad behaviour is important as well. We try to be collaborative. An example is our legislative processes; when Doug tells me we have to adjust our statutes to comply with NAIC Models Laws subject to accreditation, we get a draft on paper and send those proposals to industry stakeholders and offer them a period to give feedback so that we can practically understand how it will work for them.

We adjust based on the feedback we get. Sometimes we agree to disagree. On rare occasions, the companies will tell us something is not an issue because they’re already addressing it. Then we tell them we have a better understanding and don’t need the legislation.

When we make changes, we try to ensure that we're keeping the insurers in the loop. We try to get that feedback pipeline nice and clear and moving quickly so that we can understand the ramifications of what we're doing, they understand what's motivating us, and we understand their concerns.

When we move forward with the final piece of legislation in 99.8% of the cases, the department agrees with the industry, and it flows through the legislative process without drama.

Andrew: How do ESG considerations play into your processes and your relationships with insurers, particularly with advice around investment?

DJ: It has been a major topic of conversation within the NAIC. You have 50 state regulators and six or seven territories in the room. We appreciate that it’s an emerging issue and, unsurprisingly, there’s a diversity of views and we have not yet been able to come to a consensus.

"We look at it from a risk perspective, but I don’t have any authority to dictate
what investments can and can't be made outside of our current statutes."

When it comes to the investment realm, I want companies to make the best investments that they can because my primary focus is ensuring that the companies are going to be solvent so that they can pay claims for the consumer. If a private company wants to make an investment in something that is within the ESG-sanctioned group, that's their choice.

We look at it from a risk perspective, but I don’t have any authority to dictate what investments can and can't be made outside of our current statutes. I would side with those who don’t feel that involving insurance departments in that discussion is within our lane. Those are decisions that should be made by those companies, to their betterment or detriment.

I don't feel it's appropriate for me to dictate what a company's boardroom looks like. If they ask for my unsolicited advice, I’d say find the most qualified, intelligent, experienced people that you can. Those are the people you want to lead your company.

We grapple frequently with the impacts that climate change is having on our markets. I believe that climate change is real, however I don't concern myself with the political debates of what's causing climate change, and with what steps need to be taken to address it; that's for policymakers. As an insurance commissioner, I focus on the facts and the data. As regulators, we do need to appreciate climate change in the market and the downstream impacts on the consumer.