The New York Department of Financial Services (“DFS”) issued a circular letter on December 19, 2011 (the “Circular Letter”) emphasizing the importance of risk management and indicating that the DFS expects every insurer to adopt a formal enterprise risk management (“ERM”) function.  The ERM function should identify and manage risk exposures to the insurer within a group enterprise or at the company level when the insurer is a stand alone enterprise.  For purposes of the Circular Letter, enterprise risk across a group is defined as any activity involving one or more affiliates of an insurer that, if not corrected quickly, is “likely to have a material adverse effect upon the financial condition or liquidity of the insurer or its insurance holding company system as a whole.”

The DFS will evaluate a company’s ERM function as part of its statutory examination, but may also conduct a stand-alone ERM examination as appropriate.  The evaluation will consist of a review of the insurer’s adherence to the following ERM objectives, among other things, established by the DFS:

  • Existence of an objective ERM function that is properly resourced and positioned to provide the insurer’s board of directors and management with ongoing assessments of the insurer’s risk profile;
  • Implementation of a written risk policy that sets forth the insurer’s risk framework and risk tolerance levels; and
  • Establishment of a risk identification and quantification process.

To the extent that an insurer is part of a holding company, or other group with common control or management, the insurer’s ERM function should identify and manage risks to which the insurer may be exposed by transactions or affiliation with the holding company or the other affiliates within the group.

Click here for a copy of the Circular Letter.