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Risk-Focused Regulatory Approach to Prevent Another Frankel Situation

Learn how to minimize the risk of a Frankel-like scenario with a focus on regulatory initiatives and examinations. Explore the services of the Capital Markets Bureau and the impact on risk assessment and internal reports. Conclusions highlight the importance of institutionalizing risk management in regulatory practices.

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Risk-Focused Regulatory Approach to Prevent Another Frankel Situation

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  1. How To Minimize the Risk of Another Frankel Situation Risk-Focused Regulatory Approach Mike Moriarty - NY Insurance Dept. CAS Spring Meeting 5/8/01

  2. Frankel • A Breakdown in Then-Existing Processes • Situation Highlighted Certain Areas in the State Regulatory System that Warranted Enhancement • Event that Forces Evaluation of the Regulatory Paradigm • Proposed Initiatives in the NY Environment Are Not Driven by Frankel

  3. Mid/Late 90’s • Financial Markets Changing • Blurring of Lines Between Financial Service Industries • Financial Services Becoming Global Enterprises • In US, the Integration of Financial Services Codified by GLBA • Internally, NYID Stepped Back - Is Our Regulatory Approach Still Valid?

  4. New York Initiatives • Risk-Focused Examinations • Establishment of Capital Markets Bureau • Liquidity Analysis (Circular Letter #35 - 1999 & #33 -2000) • Derivative Use Plans • 4th Quarter Meetings • Operational Reviews of Insurers

  5. New York Initiatives (cont’d) • Increased NAIC Involvement • Heightened Department-Wide Reaction to Risk Events • Training and Off-Site Seminars • Internet/Intranet to Enhance Examinations and Examiner Knowledge

  6. CAPITAL MARKETS BUREAU • Assist in the regulation of capital markets & risk management activities of New York licensed insurers • Capital Markets Risk - the potential for loss on investment instruments or portfolios. • Risk Management - an insurer that manages its risk poorly will be a greater financial solvency threat than an insurer that manages its risk better.

  7. Capital Markets Bureau - Services • Examination Support • Transaction Review • Derivatives • ALM • Training

  8. Capital Markets Bureau - Services • Financial Analytics • Third Party Investment Management • Securitization • Information Dissemination • Research

  9. Risk-Focused Examinations • NY Is Moving Away From Triennial Full Scope Exams • Using Risk-Focused (Limited Scope) Exams in Growing #’s • Obvious Reason - Dedicate Limited Resources in the Most Effective Manner • Other Reasons • GLBA • Federal Regulation • Recent BIS Proposal

  10. Gradual Movement • No Radical Change in Process • Looking at Areas that we did not focus on before (ALM, Independent Risk Management Units, Internal Audits) • Committees at NY Dept. Meet Frequently and Changes are Continually Made to Procedures

  11. Gradual Movement • Report is Still Balance-Sheet Oriented But is Being Supplemented • More “Movement” Under Consideration • Moving Further Away from Balance Sheet Verification and More Toward Risk Assessment • Generation of an Internal Report from Exam Process

  12. EFFECT ON A FRANKEL-LIKE SCENARIO • Capital Markets Bureau Would Have Participated in Financial Analysis and in Exam Pre-Planning • “Turnover” Ratios Would Have Spit Out Frankel Insurers as Extreme Outliers • Investment Strategy Would Have Been Questioned on a Prospective Basis • Risk Management Systems Would Have Been Reviewed • “Audit Risk” Would Have Been Evaluated

  13. NAIC Financial Reporting WG • “Branding” Risk Classifications • Review How Existing Processes Provide for the Assessment of these Risks • Make Recommendations to Enhance the Examination/Analysis Process Along These Lines

  14. CONCLUSIONS • Basic Evaluation of Investment Management Practices Would Have Uncovered Fraud • Assessment of Risk Management Should Be Institutionalized in Regulatory Practices • Financial Services Industries Will Continue to Drive the Development of Risk Management • Regulatory Focus will Follow that Development, as it has in Banking Regulation

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