Getting Value Out of Your Next Financial Examination

Financial solvency regulation in the insurance industry has undergone monumental change over the last decade, and it is the financial examination that companies undergo every three to five years that has been impacted the most. Since the global f inancial crisis, state insurance departments have been slashing their budgets and cutting the number of staff dedicated to f inancial solvency regulation, while the National Association of Insurance Commissioners has been adding more regulations for companies to comply with, which has resulted in additional work for fewer regulatory staff to review and test during the financial examination. On top of additional regulations, a new method of financial surveillance, known as risk-focused surveillance, has been incorporated into the examination approach so financial examiners can conduct more efficient financial examinations. The slashing of state insurance department resources and the new regulations and approach to examinations have forced many states to turn to outside help from third-party vendors in conducting financial examinations and to fill other regulatory needs. This, in part, has led to the continued increase in financial examination costs, increases in some cases of 100 percent or more from one exam to the next.

As regulators and insurers alike seek to find their way in this difficult environment, this paper explores the history of the financial examination, the introduction of the risk-focused approach that ushered in the concept of branded risks, cost drivers such as duplication and outsourced regulation, and some potential solutions to curbing ever-increasing exam costs along with ideas for how to make the financial examination a better value proposition for the company being examined.