Current through Register Vol. 46, No. 39, September 25, 2024
(a) In order to address the need for
appropriate oversight by senior management and by the board of directors, or a
committee thereof charged with the responsibility for supervising investments,
and to provide for a comprehensive risk management process for derivative
instruments, an insurer shall establish the following with respect to
derivative transactions:
(1) appropriate
limits for various identified risks relevant to the derivative transactions
used by the insurer;
(2) procedures
and practices that control the nature and amount of such risks;
(3) adequate systems or processes for
identifying and measuring such risks;
(4) systems or processes for documenting,
monitoring and reporting risk exposures on a timely basis; and
(5) systems or processes of internal review
and audit to ensure the integrity of the overall risk management
process.
(b) The board
of directors, or a committee thereof charged with the responsibility for
supervising investments, shall receive and review quarterly reports which shall
include: information to ascertain that all derivative transactions have been
made in accordance with delegations, standards, limitations and investment
objectives contained in the derivative use plan; the outstanding derivative
positions; the unrealized gains or losses thereon; the derivative transactions
closed during the report period; a performance review of the derivative
transactions; an evaluation of the risks and benefits of the derivative
transactions; and other information necessary to ensure that the internal
control procedures are being followed.
(c) The board of directors, or a committee
thereof charged with the responsibility for supervising investments, shall
establish the following management oversight standards for derivative
transactions:
(1) The board of directors, or
a committee thereof charged with the responsibility for supervising
investments, has an affirmative obligation to inform management of its desired
risk tolerance levels. Management shall appropriately translate these risk
tolerance levels into effective policies and procedures that address both
individual transactions and entire portfolios.
(2) Management and the board of directors, or
a committee thereof charged with the responsibility for supervising
investments, shall receive sufficient information to assess the strengths and
limitations of the insurer's risk measurement systems in order to determine
appropriate risk limits. The board of directors, or a committee thereof charged
with the responsibility for supervising investments, shall also review
management's response to strengths and limitations identified through oversight
processes such as stress testing, independent validation and back-testing of
risk measurement models. Management and the board of directors, or a committee
thereof charged with the responsibility for supervising investments, shall
consider the information identified by the oversight processes, including the
potential for indirect effects of downside performance beyond the insurer's
finances, when they determine and communicate their risk profile.
(3) When management or the board of
directors, or a committee thereof charged with the responsibility for
supervising investments, identifies weaknesses in the risk management process,
they shall consider alternatives and take steps to strengthen that
process.
(4) Actions shall be taken
to correct any deficiencies in internal controls relative to derivative
transactions, including any deficiencies determined by the independent
certified public accountant in the evaluation of accounting procedures and
internal controls.
(5) Risk
oversight functions shall possess independence, authority, and
expertise.
(6) Issuer and
counterparty credit decisions for each transaction shall be consistent with the
overall credit standards of the insurer.
