G.1.8. Porter Chapter 12

Question 1

List some questions raised by the fact that Guarantee funds shift liability to other insurers, policyholders, and taxpayers:

Answer 1

• Does guaranty fund protection make consumers too unconcerned about selecting financially strong insurers?
• Do guaranty funds diminish the pressure on regulators to shut down weak insurers?
• How much of the cost for guaranty fund protection is shifted to policyholders and taxpayers?
• How effective is the record of state regulation?

Question 2

3 levels of regulatory action to control financial difficulties:

Answer 2

1. Mandatory corrective action
2. Administrative supervision
3. Receiverships, rehabilitation, and liquidation

Question 3

List some of the most frequent contributors to insurer insolvency:

Answer 3

• Rapid premium growth
• Inadequate rates and reserves
• Unusual expenses, such as unexpected catastrophic losses
• Lax controls over managing general agents
• Reinsurance uncollectible
• Fraud

Question 4

List 2 benchmarks of regulatory performance:

Answer 4

1. Low insolvency rate

2. Extent to which regulation increases expenses and restricts products

Question 5

2 steps of Regulatory Intervention Procedure following an insolvency:

Answer 5

1. Fact finding

2. Implementation of regulatory action to control financial difficulties facing insurers

Question 6

Which factor precedes nearly all of the major failures and why?

Answer 6

Rapid premium growth - reduces the margin for error in the operation of insurers; usually indication of bargain rates and lax u/w standards

Question 7

List some requirements of the insurer from the Mandatory Corrective Action:

Answer 7

• Perform certain actions to reduce its liabilities
• Limit its new or renewal business on products that are not guaranteed renewable
• Reduce its general and commission expenses by specified methods
• Increase its capital and surplus
• Suspend or limit dividend payments to stockholders / policyholders
• Limit or withdraw from specified investments
• File reports concerning the value of its assets
• Document the adequacy of its premium rates

Question 8

Briefly describe what happens during the “Fact Finding” stage:

Answer 8

Regulators from several states examine the insurer

Question 9

List some issues that regulators consider when determining when to take over supervision of the insurer:

Answer 9

• How accurate are loss reserves?
• If assets were liquidated quickly to meet current creditor demands, what would proceeds be?
• Has management enacted measures that are stringent enough to stem the operating losses?
• Is the insurer’s reinsurance adequate and collectible?

Question 10

Briefly describe the “Administrative Supervision” stage:

Answer 10

• Legal condition under which an insurer may be required to obtain the commissioner’s permission before:
• Selling or transferring assets or inforce business or using as collateral
• Withdrawing, lending, or investing funds
• Incurring debt
• Accepting new premiums
• Renewing policies that are not guaranteed for renewal; etc.

Question 11

Briefly describe “receivership”:

Answer 11

Type of bankruptcy an insurer enters when commissioner becomes receiver: Formulates plan to distribute insurer’s assets to settle obligations to customers

Question 12

Why is an insurer placed into receivership:

Answer 12

Financial difficulties are so severe that more than supervision is needed

Question 13

Briefly describe “rehabilitation”:

Answer 13

Impaired insurer continues to exist after the receivership. Use rehabilitation period to assess insurer’s financial situation by comparing its assets and liabilities

Question 14

Two possible outcomes from receivership:

Answer 14

1. Rehabilitation

2. Liquidation

Question 15

Briefly describe “liquidation”:

Answer 15

Bankruptcy proceeding in which a bankrupt organization does not have enough assets to pay all creditors. Creditors are prioritized and paid according to the types of their claims

Question 16

List some possible complications during the rehabilitation stage:

Answer 16

• How will loss reserves develop
• Can expenses be trimmed, and how fast
• How far are rates from being actuarially adequate to meet costs
• Can rates be raised without destroying the company’s ability to market to its desired market segment

Question 17

What choice do policyholders of a liquidated insurer usually have once the insurer is liquidated:

Answer 17

• Continue coverage, subject to specified maximum amounts, and be credited with a specified percentage of the account value with a new carrier
• Discontinue coverage and receive a specified smaller percentage of the account value in cash

Question 18

2 options that a receiver has during a liquidation:

Answer 18

1. Transfer all of the insurer’s business including all liabilities and assets to other insurers
2. Sells the insurer’s assets and terminates the insurer’s business

Question 19

List some activities that need to take place during the first few months of the liquidation:

Answer 19

• Give notices of liquidation to creditors and policyholders and inform them of their right to file claims
• Cancel policy coverage
• Notify agents of their duties in the liquidation
• Identify, sell, and collect assets
• Recover any improperly transferred assets
• Establish a procedure for receiving and adjudicating claims
• Make personnel decisions regarding the insurer’s staff and hire outside help, if needed

Question 20

Knowing when to take over the supervision of the affairs of insurer requires financial and administrative judgment. State two key issues to consider.

Answer 20

• How accurate are loss reserves?
• If assets were liquidated quickly to meet creditor demands, what would proceeds be?
• Has management enacted tough enough measures to stem the operating losses?
• Is company’s reinsurance adequate and collectable?

Question 21

List the usual priority classes of asset distribution when they are liquidated:

Answer 21

• Costs and expenses of administering the liquidation
• Partial payment of debts to employees for service rendered within one year of the order for liquidation
• All claims for policy losses incurred
• Claims for unearned premiums and claims of general creditors

Question 22

Three possible solutions for dealing with the complexity of interstate insolvencies to reduce redundant work and improve the consistency of the treatment of policyholders

Answer 22

• NAIC reforms
• Interstate compacts
• Federalization