5 - Financial Examinations

5.1 Mission

The mission of the Financial Examination Section is to perform statutory examinations of Massachusetts domestic insurers in order to assure the financial health of these companies and thereby protect consumers purchasing insurance products.

5.2 Goals





Conduct financial audits of domestic insurance companies in order to ensure that policyholders' and claimants' rights are protected and fulfilled, and that insurance consumers can do business with financially solvent companies.Complete

Maintain accreditation by the National Association of Insurance Commissioners (NAIC). Impose qualitative standards in the regulation of insurance. Ensure that our domestic insurance companies operate and provide insurance coverage to policyholders and consumers with the least amount of regulatory oversight and involvement from other U.S. jurisdictions, and thus with the least amount of cost to them.Complete

·

Conduct financial audits in compliance with the NAIC Financial Condition Examiners Handbook to ensure for timely and regular examination reviews that are based on a substantive "risk based assessed" audit approach toward proper allocation of examination resources within the financial operations of our domestic insurance companies.Complete

Foster an environment that will allow our domestic insurance companies to compete effectively with their peers throughout the country and the world.Complete


5.3 Primary Activities

Financial Examinations



Financial examinations are conducted in accordance with standards established by the Financial Condition (E) Committee of the NAIC as well as with the requirements of the NAIC Financial Condition Examiner's Handbook, the Division's own examination standards and Massachusetts General Laws. The principal focus of an examination is the most recent calendar year's activity; however, transactions both prior and subsequent to the "as of" examination date are reviewed when appropriate

In addition to a review of the financial condition of the insurer, examinations include a review of the company's:

· Business policies and practices

· Corporate records

· Reinsurance programs

· Conflict of interest disclosure statements

· Fidelity bonds and other insurance

· Employees' pension and benefits plans

· Disaster recovery plan

· Treatment of policyholders



In addition to this list, the review includes other pertinent matters in order to provide a reasonable assurance that the company is in compliance with applicable laws, rules, and regulations. In planning and conducting an examination, consideration is given to the concepts of materiality and risk, and examination efforts are directed accordingly.

In 2008, the Financial Examination Section completed routine statutory examinations of sixteen insuring organizations. These companies produced $8.3 billion in premium nationwide - $6.8 billion in Massachusetts. The section also continued its special purpose examinations of domestic managed care organizations to evaluate their premium rate setting processes.

The NAIC Financial Regulation Standards & Accreditation (F) Committee has a standard known as the "18 Month Rule." This standard establishes a general rule that comprehensive financial examinations conducted by state insurance departments should be completed and reports issued within eighteen months of the "as of" date of the examination. Exceptions to this rule are permitted for reasonable justification and an extension of up to twenty-two months is allowed before the state is required to roll the "as of" date of a re-initiated exam forward one year.

The Financial Examination Section conducted fifteen full-scope financial examinations with an "as of" date of December 31, 2006. All of these examinations were completed by June 30, 2008, within the "18 Month Rule" timeframe noted above.

Twenty-four insurance examinations were in progress at year's end, representing $10.9 billion in premium nationwide - $3.7 billion in Massachusetts.

Examination Reports Issued in 2008

US Direct Premium

MA Direct Premium

Surplus

Property & Casualty Insurers

American Employers Ins. Co. (One Beacon Group)

$0

$0

$35,210,000

Coface North America Insurance Company

$39,543,000

$2,236,000

$17,420,000

Electric Insurance Company

$316,155,000

$31,362,000

$331,800,000

Employers Fire Insurance Co (One Beacon Group)

$384,130,000

$94,924,000

$61,274,000

Holyoke Mutual Insurance Co. in Salem

$35,079,000

$24,123,000

$72,413,000

MA Homeland Ins. Co. (One Beacon Group)

$125,249,000

$125,249,000

$9,282,000

Northern Assur Co of America (One Beacon Group)

$236,516,000

$10,196,000

$191,951,000

OneBeacon America Ins. Co. (One Beacon Group)

$550,854,000

$38,841,000

$520,891,000

Health Insurers

Blue Cross Blue Shield of Massachusetts, Inc.

$2,098,280,000

$2,098,280,000

$628,188,000

Blue Cross Blue Shield of Massachusetts HMO Blue

$4,239,167,000

$4,239,167,000

$839,662,000

Great West Healthcare of Massachusetts, Inc.

$0

$0

$1,558,000

Massachusetts Vision Service Plan

$11,615,000

$11,615,000

$9,797,000

Life, Accident & Health Insurers

Boston Mutual Life Insurance Company

$230,416,000

$50,606,000

$89,411,000

Self Insured Groups

MIIA Property and Casualty Group, Inc.

$42,891,000

$42,891,000

$91,995

Other

Liquor Liability Joint Underwriting Association

$6,069,000

$6,069,000

$17,406,000

Massachusetts Medical Malpractice Reinsurance Plan

$9,265,000

$9,265,000

($22,709,000)

TOTALS

$8,325,229,000

$6,784,824,000

$2,895,549,000


Examinations in Progress as of 12/31/2008

US Direct Premium

MA Direct Premium

Surplus

Property & Casualty Insurers

Arrow Mutual Insurance Co.

$7,548,000

$7,319,000

$29,055,000

Bunker Hill Ins. Co. (Plymouth Rock Group)

$38,811,000

$33,215,000

$19,971,000

Pilgrim Ins. Co. (Plymouth Rock Group)

$59,133,000

$59,133,000

$10,220,000

Plymouth Rock Assurance Co. (Plymouth Rock Group)

$238,699,000

$225,381,000

$122,412,000

Health Insurers

Dental Service of Massachusetts

$357,179,000

$357,179,000

$153,890,000

Fallon Community Health Plan, Inc. (Fallon Group)

$438,481,000

$438,481,000

$171,470,000

Fallon Health & Life Assur. Co. (Fallon Group)

$8,492,000

$8,492,000

$3,620,000

HPHC Insurance Co. (Harvard Pilgrim Group)

$1,874,216,000

$1,803,871,000

$373,473,000

HPHC of New England, Inc. (Harvard Pilgrim Group)

$321,598,000

$0

$28,621,000

HPHC, Inc. (Harvard Pilgrim Group)

$91,686,000

$47,264,000

$23,510,000

Life, Accident & Health Insurers

John Hancock Life Ins. Co. (John Hancock Group)

$4,363,283,000

$339,782,000

$4,077,485,000

John Hancock Var. Life Ins. Co. (John Hancock Group)

$1,094,513,000

$64,620,000

$606,935,000

New England Life Ins. Co.

$2,000,855,000

$221,316,000

$541,737,000

Self Insured Groups

Mass Govt and Educ Self-Insured Group

$15,189,000

$15,189,000

$11,257,000

Mass. Bay Self-Insured Group

$2,358,000

$2,358,000

$444,000

Mass. Catholic Self-Insured Grp

$5,412,000

$5,412,000

$5,777,000

Commonwealth Transportation Comp. Corp.

$3,346,000

$3,346,000

$0

Construction Industries Compensation Corp.

$3,177,000

$3,177,000

$0

Graphic Arts Compensation Corporation

$1,002,000

$1,002,000

$0

Independent Schools Compensation Corp

$7,812,000

$7,812,000

$0

Manufacturers of Mass. Comp. Group, Inc

$2,229,000

$2,229,000

$0

Self-Insured Lumber Business Assoc., Inc.

$6,874,000

$6,874,000

$42,000

Wholesale/Retail Suppliers Comp. Corp

$2,761,000

$2,761,000

$0

Fraternal Organizations

Catholic Assn of Foresters

$252,000

$197,000

$6,832,000

TOTALS

$10,944,906,000

$3,656,410,000

$6,186,751,000


Special Brokers Tax Collection

The Financial Examination Section collects state taxes on the Excess and Surplus Lines business written by Special Brokers licensed in Massachusetts. Collections in calendar year 2008 for business written in calendar year 2007 totaled $25.3 million on written premium of $631.7 million.

Life Company Certification and Valuation Fees Collection

At the end of each calendar year, Division financial examiners are charged with compiling the actuarial valuations of insurance reserves of Massachusetts domiciled life insurance companies as described in the annual financial statements and the actuarial reserve exhibits. These valuations are reviewed in context with the actuarial opinions provided by the companies - including asset adequacy testing required on these reserves. The Division then issues a certification of the company's entire reserve liability. Under Massachusetts law, the companies are required to pay fees for the annual valuation process and for the certificates issued. Valuation and certification fees billed in 2008 amounted to $652,000.

5.4 Special Activities

Training & Professional Accomplishments

Three Section managers attended the Society of Financial Examiner's (SOFE's) annual Career Development Seminar (CDS) on August 2008. SOFE is a professional society made up of insurance examiners throughout the U.S. and its territories. Through lectures, roundtable discussions and interactive formats, seminar participants learn the latest developments, current and emerging issues and new techniques in the regulation of insurance companies. Topics also include the new risk-focused examination approach, fraud detection, IT development and the latest legislation, auditing and regulatory issues.

Two managers attended the Annual NAIC Financial Summit on Oct 28 - 29, 2008. This annual training event covered a variety of regulatory topics including financial reporting and statutory accounting updates, principles-based reserving techniques, reinsurance, catastrophic risk updates, international and investments issues, legal and IT issues with financial impact, plus the current economic climate and solvency regulation.

In 2008, one of the section's Supervising Examiners achieved the distinction of being awarded the Certified Financial Examiner (CFE) professional designation from the Society of Financial Examiners (SOFE). One of the section's Senior Examiners achieved the distinction of being awarded the Accredited Financial Examiner (AFE) professional designation from SOFE. The CFE designation is the ultimate goal of the SOFE credentialing program, while the AFE designation is a prerequisite to achieving the ultimate goal of Certified Financial Examiner. All managers in the Financial Examination section are Certified Financial Examiners and/or Certified Public Accountants.