Barbara Richardson: There are multiple challenges regulators find in monitoring insurer’s investment portfolios. This is because investment portfolios are shifting more than they had in the past as the insurance carriers shift their risk appetites in the current market conditions.
"Of most concern for regulators are complex investments that lack
transparency about their underlying investment risks."
One of the challenges regulators watch for is the potential of Risk Based Capital (RBC) arbitrage, which is due to an investment being reported in an asset category where the RBC charge may not be appropriate for the underlying risks. Regulators also watch to ensure that carriers are appropriately reporting and assuring that the transaction terms are fair and reasonable for investments that have any related party connections. This could be investments that are created, sourced, or managed by affiliates or related parties.
Of most concern for regulators are complex investments that lack transparency about their underlying investment risks. This would include the use of collateral loans and private placement investments, as well as structured securities, for example.
These concerns can be handled with open communication between regulators and the industry – which would not only enhance understanding for both the regulator and the industry, but also help ensure that the two have a proper handle on the underlying risks and strategies in the insurance carrier’s investments. Overall, it would also help to build a positive relationship where open dialogue is encouraged.
Barbara: Our financial surveillance team members actively monitor the work streams at the National Association of Insurance Commissioners (NAIC), and we take as many opportunities as we can to work with our fellow regulators and our domestic industry players to keep up with any evolving solvency concerns or issues around capital allocation. This helps us to identify and address potential RBC arbitrage, as well as monitor investment for signals of complex investment strategies or tools.
Arizona also focuses on actuarial guidelines, such as Actuarial Guideline 53 (AG 53), which was designed to help the regulator and the reporting entity identify outlier investment assumptions that may be used in their Actuarial Memorandum and cash flow analysis. This tool is helpful as it supports a healthy discussion and engagement on specific asset cash flow assumptions in the AG 53 filing that will lead to more transparency between the regulators and the industry.
"We continue to see companies adjusting their investment portfolios to ensure they are appropriately structured to mitigate against potential risk factors."
Barbara: Arizona has not identified any significant trends across its domestic industry. Each insurance company has been customising their approach in their investment allocation driven by its asset liability matching and cash flow needs. To date, none of the bank failures have significantly impacted our domestic insurers.
We continue to see Arizona domestic companies adjusting their investment portfolios and strategies to ensure that they are appropriately structured to support their business plan and to mitigate against potential risk factors. These are all signs of good corporate governance.
Barbara: Market regulation is a very broad topic, and regulatory actions in this area can be addressed through a continuum of tools – from data calls to examinations. That being said, regulators attempt to use the tool that best suits the investigation or inquiry and causes the least market disruption. Arizona’s approach is to perform some preliminary inquiries to gauge the size and complexity of the issue we are concerned about before we take action so that we can focus our regulatory action being careful not to use a scattergun approach.
"Arizona has a healthy relationship between its regulators and its domestic insurance investment teams, so we don’t feel there are any misconceptions."
The Arizona Department of Insurance and Financial Institutions (DIFI) also uses the same approach when considering any policy or legislative changes it might suggest. For the 2024 legislative session, DIFI will be presenting some ideas for clarifying language around our agency budget and we will be suggesting a change to our health appeals statute to help align the state process to the current federal requirements. As always, we are open to working with the industry should they wish to have a state legislator introduce a bill for them. This helps ensure that both the industry and the regulators have a good understanding of what the bill was intended to do.
Barbara: Arizona has a healthy relationship between its regulators and its domestic insurance investment teams, so we don’t feel there are any misconceptions.
The Arizona insurance regulator’s primary goal is to ensure safe, competitive, and solvent markets for the consumers. This is best done through open communication and respect between the industry and the regulators. This does not mean that we will always agree with one another, but ultimately both the regulators and the industry want healthy competitive markets that rely on healthy investment portfolios ensuring the carriers are able to pay their obligations to the Arizona consumers at claim time.