Regulator’s view: Utah’s Commissioner Jon Pike on managing bigger carriers

Commissioner of the Utah Insurance Department, Jon Pike, discusses how to balance the investment needs of smaller and larger carriers.

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Jon Pike, Commissioner, Utah Insurance Department.

Andrew: Can you give us a brief introduction into your role, remit, and the structure of your organisation?

Jon Pike: I am the Utah state insurance commissioner, which is a governor-appointed position and is included in the state cabinet. That appointment has to be ratified by the Utah Senate.

I worked for 30 years in the health insurance arena for a private insurance carrier and then two and a half years as the regulator.

We are a relatively small state of about 3.5 million people, and whilst our insurance industry is significant to the state, we don't have all the large insurance carriers based here. Our department is just under 100 full-time employees. We're small, but we pack a pretty good punch as far as bringing jobs and stability to the state.

"We can be most effective by helping to protect the financial stability of
our insurers by maintaining strong relationships."

Andrew: What is the Utah Insurance Department’s approach to market regulation in 2023 – and what are you focused on in terms of new policy, both in the short-term and long-term?

Jon: The most important thing that we can do is build good relationships. The word that we use with our insurers is ‘reciprocal’. We can be most effective as a regulator by helping to protect the financial stability of our insurers and their ability to pay claims – essentially, by knowing them and maintaining strong relationships.

It’s about having a relationship that is built on trust – so we can pick up the phone and speak to them directly, without waiting for a three-to-five-year examination. We often meet or speak frequently on the phone with many of our domiciled carriers. That meeting is generally with one of our financial regulators.

In addition to having the code of law, maintaining a reciprocal relationship with our insurers is the best thing we can do; it’s our building block.

"We make sure that these insurers have a sound policy, team, and strategy
in place that, in turn, protects policyholders and adheres to our code."

That's both a short and long-term strategy for us – and it’s been helpful because we trust them, and they trust us. We get to know their teams, their policy, and their investment strategy.

But the policy is only as good as the people involved. So, we make sure that these insurers have a sound policy, team, and strategy in place that, in turn, protects policyholders and adheres to our code.

Andrew: Do those relationships change when you're talking to a regional, Utah-based insurer versus a national carrier? Do you monitor the smaller ones more closely and offer more expertise, or is it the opposite – that the big players need more watching?

Jon: It depends, but often ‘smaller’ means ‘newer’. We tend to pay more attention to the newer organisations so we can make sure they get their land legs – and know that too-rapid growth is something we look out for.

No matter what kind of insurance company they are, though, that can happen. We hear rumours – which sometimes are true – that certain companies try to grow fast purely to be sold.

We want to make sure they're not growing as fast as they can at all costs and disregarding the ability to pay, because that never ends well. One particular case, for example, came out of the Affordable Care Act and the creation of a cooperative that had funding from the federal government. Their growth strategy was understandable, but you have to be able to pay the claims, which they couldn’t.

If the growth is happening and the money's coming in, it might look like these fast-growing companies are doing okay, but we’re concerned about making sure that the business is sustainable long-term – when the growth slows down, for example, or when issues start to hit, or if more competition enters the market.

We have regular contact with newer companies – and watch them more carefully – because we’ve seen them face the toughest struggles historically.

However, when it comes to potential ramifications, fines, and forfeitures of rule breaks, we treat all carriers alike, even the bigger ones. Just because they are a well-known carrier, doesn’t mean they get preferential treatment for issues like that.

Andrew: When it comes to monitoring insurance investments, what are the top legislative difficulties you encounter – and how do you maintain positive relationships with insurers throughout this process?

Jon: Next year we plan to update and modernise the investment chapter of our code, and we have invited several insurance company executives to review our draft bill. We’ll also seek industry suggestions to refine it.

Even though we're not going to turn over the process of writing the investment code to the insurers, we want their input as it’ll likely lead to a much improved and more effective investment statute. They've been appreciative of that opportunity, which goes back to the reciprocal desire to maintain good relationships.

"We need the carriers to understand their level of risk is important to us and to
ascertain if they are closely monitoring third-party investment managers."

The area where we have the most discussion with insurance companies is when they have a strong view of what their strategy ought to be. Some feel that because of their expertise in the subject, we should listen to them. Often, this is the case with the larger companies.

We want to make sure we're doing our jobs and allowing them to do theirs – which can mean fulfilling their strategies in a way that works for them. However, we need the carriers to understand their level of risk is important to us and to ascertain if they are closely monitoring third-party investment managers. Are they managing for liquidity and asset liability matching as effectively as they need to be? This is often the key question.

Andrew: What do you see as the most pressing asset management issues the Insurance Department currently faces – for example, are they related to risk, solvency, capital allocation, capital reserves, or sustainability?

Jon: There are three important aspects here.

The first is understanding the expertise and competence of an insurance carrier’s investment management team. Then we need to know about their risk appetite. Are they closely monitoring their investments? How effectively do they manage for liquidity and asset liability matching? Do they do extensive modelling for economic stress scenarios? This area has become especially apparent due to recent crises in the banking sector.

We need to ensure they’re modelling for those stress scenarios, that their investment policy is integrated with their corporate objectives – and all is working according to plan.

The second aspect concerns the significant events we've seen in the world over the past few years. These are partly driving volatility and uncertainty in our markets. Low hanging fruit – in terms of making money – has disappeared from the market.

We need to focus on macroeconomic forces, including the war in Ukraine, the situation between China and Taiwan, supply chain issues, deglobalisation trends, supremacy of the US dollar, and increasing sovereign debt (the US included) as key market drivers and liquidity risks for insurers.

The final aspect is fiscal and monetary policy. No surprise to anyone, the US is divided along ideological lines, and these divisions often lead to uncertain and sometimes erratic fiscal policy changes. This can happen as frequently as every two years if the House Majority changes – which can mean significant change to fiscal policy.

Sometimes the US Federal Reserve makes the situation unintentionally worse due to factors it can’t control. For example, the Fed can’t control supply chain issues or the war in Ukraine, but combined with modifying the interest rate, these things have big impacts, nonetheless.

Andrew: How have recent bank failures, rate hikes by the Fed, and ongoing inflation changed the way insurers’ portfolios are monitored, if at all?

Jon: We've placed an increased emphasis on discussing the causes of recent bank failures, inflation, supply chain issues, increased autocratic nationalism, and the war in Ukraine with insurers, investment managers, and company executives.

"We use a risk-focused approach to do the analysis for the key
activities of all insurers, including investment management."

We’re not yet concerned enough to take formal action, but we do need to have more frequent conversations to ensure we’re on the same page. This is particularly the case with insurers that have more complex, longer-dated investments.

We use a risk-focused approach to do the analysis for the key activities of all insurers, including investment management. We’ve spent more time focusing on investments in the wake of these instances of increased volatility in valuations.

Andrew: What do you expect going forward, and how do recessionary conditions and macroeconomic factors play a role in planning for the future?

Jon: We expect to strengthen the reciprocal relationships with our carriers, their CEOs, and their investment teams. Ideally, it would feel like we are working closely toward the same goal – in a partnership, not an opposition. We can keep communication lines open whilst being a trusted regulatory partner.

Going forward, insurers will need to be more agile than ever, given volatile market conditions and societal changes. They will need to adapt to these once-in-a-generation macroeconomic changes. Our goal is to keep the industry strong whilst enabling our carriers to keep their promises to policyholders.