Q&A with Dan Petterson, Director of Financial Examinations

Author: Jill Hoffman

Part of what makes Vermont the premier domicile for captive insurance is our unique infrastructure made up of in-house examiners and support personnel. Vermont Captive’s third quarter newsletter features a Q&A with Dan Petterson, Director of Financial Examinations for the Vermont Division of Captive Insurance. Dan leads a group of 23 captive insurance examiners and is responsible for ensuring that Vermont’s captive insurance companies are operating responsibly and in accordance with applicable rules and regulations.

WHAT IS THE APPROACH YOU TAKE WHEN CONDUCTING CAPTIVE EXAMINATIONS?
“Our focus is on ensuring the solvency of the captives we regulate and, in so doing, we also look to ensure the protection of the various captive stakeholders.  Our regulation, in general, is a multi-pronged approach which starts with a thorough vetting process at licensure and includes ongoing examinations, financial analysis, business plan monitoring, and communication with our captives.  Our exams are all risk-focused, meaning we focus our resources on the areas that pose the greatest risks to solvency of the company; for example, liquidity, reserve adequacy, asset valuation, or underwriting.  We also focus on other risk areas such as corporate governance, internal controls, third-party service providers, related parties, cyber, and risk management.  Additionally, assessing and monitoring of prospective risks has become a very important mechanism to ensuring the ongoing health of our captives.  While we learn and understand where a company has been and how they have performed during an exam, assessing prospective risks allows us to understand whether or not the captive can actually get where they are trying to go.”

IN TERMS OF EXAMINATIONS, WHAT DIFFERENTIATES VERMONT FROM OTHER CAPTIVE DOMICILES?
“There are several different models that captive domiciles use to regulate their entities, and each has its strengths and weaknesses.  Some have their own exam staff, others use contractors.  Some are part of their state’s traditional insurance divisions, some have separate examiners and analysts, some do minimal exam and financial analysis work and others do very thorough exams and financial analysis.

In Vermont, our regulatory division has its own separate captive insurance division and examination team.  Our analysts and examiners are one in the same which allows our team to gain in-depth knowledge of our companies.  We perform routine financial analysis and risk focused exams on all regulated entities.

In terms of frequency, we perform our exams on three, four or five-year cycles—depending on an assigned priority-rating, with higher priority companies getting examined more frequently.  Currently, over 80% of our companies are low priority, 3% are high and the rest are somewhere in between.

This model of regulation has worked very well for us through the years and it has allowed us to customize our processes to focus not only on delivering efficient and effective exams, but also providing value to the captives we regulate.”

CAN YOU GIVE A FEW EXAMPLES OF HOW VALUE IS PROVIDED TO COMPANIES THROUGH THE EXAMINATIONS PROCESS?
“First, we see a lot of captives, so our examiners have a lot of experience!  Our team has examined roughly 700 captives from 2012 (around the same time we transitioned to a risk-focused approach) through 2017, including roughly 100 RRGs. Because of that experience, we’re able to discuss best practices with companies and share what we’re seeing out in the industry.  Second, we get to know our companies very well and, in some instances, we’ve been able to help companies achieve a lower priority level, meaning exams happen less frequently, thereby reducing examination costs.  Third, we work to provide value by making the exam process itself as efficient as possible.  We currently have an exam team comprised of 23 experienced and seasoned professionals and I am very proud of their initiative, commitment and the accomplishments they have made, not only in our process, but also in professional development.  They continue to raise the bar.  As a result of their hard work, our total time to complete exams and issue reports has improved from an average of over 280 days to less than 180 days and the average hours to complete exams has declined by roughly 10%.  That means our companies are receiving the same thorough and thoughtful examinations from our expert examiners—all in less time and for less money.”

CAN YOU GIVE US AN IDEA OF THE COST OF AN EXAM?
“Certainly.  Exam hours and costs can vary significantly based on the size and complexity of the company under exam.  The average exam costs from 2012-2017 were:

Pure: $10,500 (ranging from $4,000-$30,000)

RRG: $38,000 (ranging from $10,000-69,000)

SPFI: $26,000 (ranging from $18,000-$45,000)”

WHAT ARE SOME OF THE THINGS YOU ARE FINDING FROM COMPANIES IN THIS MOST RECENT EXAM PERIOD?
“We found a few issues related to operations, financial reporting, compliance, corporate governance, and internal controls.  During the 2017 fiscal year exam period, 5 of 120 exams had report comments, meaning significant findings of fact—usually material.  Also, 10 of 120 exams had management letter comments which are generally less severe, but still needing to be reported and addressed by management.  We are currently about ¾ of the way complete on our 2018 exam list and so far, we’ve had one exam report comment and eight management letter comments.  Additionally, in 2018 we started tracking discussion-only comments and we have had 32 to-date.  Discussion-only comments are much less severe and can range from a minor compliance issue, a simple immaterial mistake, or a recommendation on how to improve a process.

Another key area of focus for us over the past few years is tracking who we worked with during exams and how well it went.  We are looking closer at communication, timeliness, and quality of interactions with our various contacts throughout the exam process in an attempt to find additional efficiencies.  Any time we have an opportunity to become better or more efficient at any part of our jobs, it results in better value for the entities we regulate.”

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