insolvency regulation Flashcards
one of core duties of insurance regulation
Early detection and correction of financially troubled insurers
-Protecting the public from insolvent insurers is one of the principal goals of insurance department
3 levels of regulatory action to control financial difficulties
Mandatory corrective action
- Administrative supervision
- Receiverships, rehabilitation, and liquidation
Once a state court judge has determined an insurer is insolvent
State law governs insurer’s orderly liquidation and payment of claims Guaranty funds pay claims made against insolvent insurers
Most frequent contributors to insurer insolvency
- Rapid premium growth – did not realize the business risk (less knowledge of loss exposure)
- Inadequate rates and reserves
- Unusual expenses, such as unexpected catastrophic losses
- Lax controls over managing general agents - They could be writing unprofitable, very risky business that could lead to insolvency
- Uncollectible reinsurance – many companies rely heavily on reinsurance, and will become insolvent if it cannot be collected
- Fraud
Rapid premium growth precedes nearly all of the major failures
- Reduces the margin for error in the operation of insurers
- Usually indication of bargain rates and lax u/w standards
Steps of Regulatory Intervention Procedure
Fact finding & Implementation of regulatory action to control financial difficulties facing insurers
- Fact Finding = Regulators from several states examine the insurer
- this could be replaced by using IRIS /RBC/Annuals statements to grade insurers and highlight those that might be at risk of insolvency
- Implementation of Regulatory Action=Regulators choose an appropriate action based on the seriousness of the condition
Mandatory Corrective Action
- hazardous condition regulation
- If fact finding reveals policyholders or public may be adversely affected by the insurer’s financial condition or poor results on financial examinations, authorizes commissioner to order an insurer domiciled in the state to take specified actions to improve its financial condition
- 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
Administrative Supervision
- Model Supervision Act
- if hazardous condition regulation fails or financial conditions are worse than previous level
- regulators may seek approval from the court to take formal control of the insurer’s management, in order to rehabilitate the insurer
- Administrative Supervision is the 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 them as collateral
⇒ Withdrawing, lending, or investing funds
⇒ Incurring debt
⇒ Accepting new premiums
⇒ Renewing policies that are not guaranteed for renewal
⇒ Merging with another insurer
⇒ Entering into a reinsurance agreement
⇒ Paying specified policy or account values
⇒ Making any management change
⇒ Increasing officer or director compensation
Receiverships
- Financial difficulties are so severe that more than supervision is needed
- Type of bankruptcy an insurer enters when commissioner becomes receiver, formulates plan to distribute insurer’s assets to settle obligations to customers
- Two possible outcomes= Rehabilitation & Liquidation
Rehabilitation
- Impaired insurer continues to exist after the receivership
- Use rehabilitation period to assess insurer’s financial situation by comparing its assets and liabilities
- If rehab is feasible, often try to find an investor to invest capital, perhaps in return for an ownership stake
- Must decide if insurer’s assets sufficient to meet claims and other liabilities
Liquidation
- 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
- Usually the interval from receivership to liquidation is only a few months, Damage to reputation once in rehab may be too much to overcome
- Receiver has two options: Transfer all of the insurer’s business including all liabilities and assets to other insurers or Sells the insurer’s assets and terminates the insurer’s business
- Regulators make every effort to continue coverage for a liquidated insurer’s customers
Why does the regulator need to consider how, or if, these actions are communicated to the public?
-If the public learns the company is in trouble they may take their business elsewhere, guaranteeing that the company will not survive
Bankruptcy process for insurers different
- Non-insurance goes to court directly
- insurance, receiver is assigned for the liquidation. Before liquidation, regulator can restrict business of financially troubled insurers or take corrective actions/control of companies before it goes insolvent
- Bankruptcy is handled at state level instead of at federal level
- There is a guaranty fund to still pay for claims even though there are restrictions
argument for & against more stringent solvency for insurance industry
- argument for more stringent solvency for insurance industry=insurance, unlike most other products, is a promise to pay that the public depends on. Insolvencies to insurers are far more threatening than bankruptcies of noninsurance companies
- argument against=insurer insolvencies are rare compared to the non-insurance industry and in the event of insolvencies, guaranty funds have done a good job of compensating policyholders, system is currently working reasonably well to prevent insolvencies, More Stringent solvency regulations might cost too much and shift some of that cost to the policyholders.
