Insolvency Flashcards
What is the Solvency Modernization Initiative?
In 2008, state insurance regulators started the Solvency Modernization Initiative (SMI). The purpose was to evaluate & improve the regulatory framework for insurer solvency. The key components of SMI are:
- capital requirements
- governance and risk management
- group supervision
- statutory accounting
- financial reporting
- reinsurance
NAIC Solvency
What is the NAIC’s mission?
the NAIC’s mission is to protect policyholders. Their overall method is to combine financial & market regulation.
NAIC Solvency
What are the stages of the U.S. financial regulatory process?
The 3 stages of the U.S. financial regulatory process are:
- mitigate
- correct
- provide a backstop
So, the NAIC takes steps to mitigate foreseeable risks, takes corrective action if hazardous financial conditions are detected, and ultimately provides a backstop of financial protection if an insolvency does eventually occur (Ex: state guaranty associations).
NAIC Solvency
Factors to consider when judging regulatory effectiveness
were Rehabilitation actions effective
did regulations help Identify & correct problems before policyholders were harmed
how frequent were Insolvencies and how effective were the guaranty funds in reimbursing policyholders
is there a positive Cost-benefit analysis of the regulations
is the insurance marketplace Healthy
NAIC Solvency
Identify & briefly describe the 7 core principles of U.S. insurance financial solvency
POORER-C
Reporting (includes disclosure & transparency)
- public financial statements
- details in paragraphs 19-24
Off-site exams
- regulators maintain an insurer profile using NAIC tools such as FAST (Financial Analysis Solvency Tools.)
- details in paragraphs 25 (sections 26-28 not on syllabus)
On-site exams
- risk-focused exams covering governance, management, financial strength
- details in paragraphs 29-31 (sections 32-34 not on syllabus)
Capital adequacy
- RBC and other tools
- details in paragraphs 35-40
Regulatory control of risky transactions
- require regulatory approval for transactions that could affect insurer’s ability to fulfill policyholder obligations
- details in paragraphs 41-42 ← not on syllabus
Prevention & correction
- timely action to address potential risks (may include regulatory enforcement powers)
- details in paragraphs 43-46
Exiting market
- framework for orderly exit (includes receivership scheme for policyholder obligations)
- details in paragraphs 47-48
NAIC Solvency
What are the priorities of SMI?
Priorities in the Solvency Modernization Initiative include:
- create a document explaining the U.S. insurance regulatory system
- examine international developments
- comply with ICPs (Insurance Core Principles) promulgated by the IAIS (International Association of Insurance Supervisors)
- learn from the global financial crisis
NAIC Solvency
Reasons for the development of Reinsurance Regulatory Modernization Framework
- promote competition in reinsurance market
- reflect globalization of insurance (by recognizing foreign insurers & streamlining regulation)
- reduce penalties for unauthorized reinsurers that are strongly capitalized
NAIC Solvency
3 reasons NAIC proposed RRMF be implemented on a federal basis
- preserve and improve state-based reinsurance regulation
- uniform implementation in all states
- comprehensive alternative to related federal legislation (that may be more focused on other issues)
NAIC Solvency
What is the Nonadmitted & Reinsurance Reform Act of 2010?
It is part of Dodd-Frank and applies to nonadmitted insurance, which includes surplus/excess lines insurance and reinsurance. In very general terms, NRRA gives the customer’s home state exclusive authority to regulate the placement of nonadmitted insurance. It was discussed more fully in another reading no longer on the syllabus so several of the sample answers in the examiner’s report aren’t relevant anymore.
Provisions of NRRA include:
a state cannot deny credit for reinsurance if certain conditions are met:
- if domiciliary state has already granted credit
- if domiciliary state is an NAIC-accredited state
a state may proceed with reinsurance collateral reforms on an individual basis (if the state is NAIC-accredited)
a state is given sole responsibility to regulate solvency for a reinsurer
NAIC Solvency
Reminder to look at Fall 2016 #5 and Spring 2014 #3
Design rate regulation and solvency regulation systems
NAIC Solvency
Describe reasons for insurer insolvency
Governance
New product/Market
Growth
Small Size
Deficient Reserves
Underpricing
Catastrophe
Reinsurer Insolvency
Asbestos
Poor Investment Results
Porter Insolvency
Identify the 2 main steps of state DOI regulatory intervention
Step 1: fact-finding:
- examine insurer using resources such as financial statements, RBC, IRIS,..
- regulator must also use expert judgment since there may also be qualitative warning signs
Step 2: select appropriate regulatory action:
- see below for 3 levels of actions
Porter Insolvency
Identify the 3 levels of regulatory action the state DOI may impose on financially weak insurers / What reasons would cause an insurer to be subject to the above regulatory actions? / What actions is the regulator authorized to take for each action level?
Mandatory action level
RBC < 150% (Regulatory Action Level or below)
multiple IRIS ratios outside acceptable ranges
judgment by regulator that that policyholders are at risk
/
regulator requires insurer to submit financial improvement plan
regulator requires reduction in liabilities (and/or increase in capital)
regulator places restrictions on new/renewal business
Administrative supervision
mandatory corrective actions FAIL
RBC < 100% (Authorized Control Level or below)
further deterioration in IRIS ratios
judgment by regulator that that policyholders are at risk (regulator has wide discretion)
/
regulator must give consent for insurer to incur new debt
regulator must give consent for insurer to issue new policies
regulator must give consent for insurer to purchase reinsurance
regulator must give consent for insurer to do basically anything “important”
Receivership (a type of bankruptcy)
mandatory corrective actions & administrative supervision FAIL
regulator judges that insurer is wholly incapable of managing its operations
/
a process in which a legally appointed receiver acts as custodian of a insurer’s assets & operations
(has full discretion in managing insurer’s assets)
specific actions open to the receiver are: rehabilitation and liquidation
Porter Insolvency
Describe the receivership actions of rehabilitation & liquidation
rehabilitation:
* reorganization of an insurer’s operations finances so that debt obligations can at least partially be met with future earnings
* (may require external capital investment to stabilize operations finances)
* liquidation usually follows
liquidation:
* closure and distribution of assets to creditors in priority order
Porter Insolvency
What is a state guaranty fund?
- a fund administered by each state to protect policyholders in an insolvency
- the fund pays most outstanding claims and refunds most unearned premiums (subject to limitations)
Porter Insolvency
