D.1 US solvency framework Flashcards

1
Q

Implementation of the US financial regulatory mission

A

3 stage process:

  1. Mitigate / eliminate some risks in insurance via guardrails
    - legal restrictions or regulatory approval requirements
    - licensing applications
  2. Financial tools and oversight to work with insurers to implement corrective actions to avoid failures
    - regulators evaluate companies and identify problems before they occur
  3. provide a backstop of financial protection if insurer rehab or liquidation is required
    - take action based on falling RBC levels
    - RBC allows legal authority for reg actions
    - can include conservation, rehab, or liquidation

Market Regulations
-oversight of insurers behavior in the market regarding PHs, claimants, competition, and reporting

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2
Q

Preconditions and foundations for effective regulation

A
  • To achieve its missions, the regulatory system must have requisite authority
  • risk based approach to regs - attention is paid to the greatest risks faced by insurers
  • balance regulatory costs and benefits
  • both under and over regulation is bad
  • diversity of perspectives in the US system leads to a centrist view
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3
Q

US insurance financial solvency 7 core principles

A
  1. Regulatory reporting, disclosure, and transparency
  2. off site monitoring and analysis
    - financial analysis solvency tools (FAST):
    - IRIS = insurance regulatory information system; baseline solvency screening and analysis
    - Scoring system; similar to IRIS
    - insurer Profile System: :produce quarterly profiles on insurers, includes snapshots of company
    - financial analysis handbook
    - NAIC financial analysis working group
  3. on site risk focused examinations
    - look at corporate governance, mgmt oversight, financial strength
    - full exam at least once every 5 years
    - allows regulators to assess and evaluate solvency
  4. reserves, capital adequacy, and solvency
    - use conservative stat accounting principles
  5. Regulatory control of significant, broad based transactions and activities
    - amount of dividends paid, licensing requirements, reinsurance, transactions with affiliates
  6. Preventive and corrective measures
    - regulator can enforce corrective and preventive measures take place
    - RBC system gives regulators the authority to take action
  7. Exiting the market and receivership
    - defines options for orderly exit or marketplace for insurer
    - handles M+A, reins
    - ensures payment of PH obligations
    - state guaranty associations are established to protect PHs
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4
Q

Accreditation program for state insurance departments

A

purpose - set minimum baseline standards for solvency regulation

emphasis on accreditation program

  1. adequate solvency laws and regulations
  2. effective and efficient financial analysis and examination process
  3. Cooperation and information sharing with other regulatory officials
  4. Timely and effective action when the company is identified as financially troubled
  5. Appropriate organizational and personnel practices
  6. effective processes for company licenses and review of proposed changes in control
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5
Q

US insurance financial regulatory oversight and role of capital requirements

A

regulation overview:

  1. state lawmakers and regulators limit some risks through restrictions on activities
  2. regulators perform financial oversight to identify troubled companies
  3. Lawmakers and regulators establish backstops and safeguards

Limitation of risks through design of the system

  • conservative accounting practices
  • discourage certain activities
  • restrict investment options, “prudent person” approacj

Financial Oversight and intervention powers
-intervention based on RBC levels

Regulatory backstops

  • state guaranty funds when claims cannot be paid
  • rRBC analysis to trigger interventions

Financial oversight tools and resources - help identify problems

Financial Analysis: FAST and NAIC FAWG

supervisory plans
- outlines types of surveillance, resources dedicated to oversight

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6
Q

Insurance group supervision

“windows and walls” approach

A
  • regulators have windows to scrutinize group activity and asses potential solvency
  • walls protect the capital of the insurer by requiring commissioner approval of material related-party transactions
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