NAIC Solvency

Question 1

Solvency Modernization Initiative

Answer 1

In 2008, state insurance regulators started the Solvency Modernization Initiative (SMI).

Purpose: evaluate & improve the regulatory framework for insurer solvency.

Key components:
* capital requirements
* governance & risk management
* group supervision
* statutory accounting
* financial reporting
* reinsurance

Question 2

NAIC Mission

Answer 2

To protect policyholders. Method is to combine financial & market regulation.

Question 3

3-Stage financial regulatory process

Answer 3

MAP

1. Mitigate foreseeable risks
2. Take corrective action if hazardous financial conditions are detected
3. Ultimately provide a backstop of financial protection if an insolvency does eventually occur

Question 4

Judging regulatory effectiveness

Answer 4

RIICH
* 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

Question 5

7 core principles of US insurance financial solvency

Answer 5

POORER-C
Prevention & correction
* timely action to address potential risks (may include regulatory enforcement powers)

Off-site exams
* regulators maintain an insurer profile using NAIC tools such as FAST (Financial Analysis Solvency Tools)

On-site exams
* risk-focused exams covering governance, management, financial strength

Reporting (includes disclosure & transparency)
* public financial statements

Exiting market
* framework for orderly exit (includes receivership scheme for policyholder obligations)

Regulatory control of risky transactions
* require regulatory approval for transactions that could affect insurer’s ability to fulfill policyholder obligations

Capital adequacy
* RBC and other tools

Question 6

Solvency Modernization Initiative priorities

Answer 6

• create a document explaining the US 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

Question 7

Reasons for development of Reinsurance Regulatory Modernization Framework (RRMF)

Answer 7

• promote competition in reinsurance market
• reflect globalization of insurance (by recognizing foreign insurers & streamlining regulation)
• reduce penalties for unauthorized reinsurers that are strongly capitalized

Question 8

Reasons for RRMF to be implemented federally

Answer 8

• 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)

Question 9

Provisions of the Nonadmitted & Reinsurance Reform Act of 2010 (NRRA) - for reinsurance

Answer 9

• 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 state is NAIC-accredited)
• a state is given sole responsibility to regulate solvency for a reinsurer

Question 10

Types of rate regulation

Answer 10

• Prior approval
• File & use
• Use & file
• Open competition

Question 11

Motivations of RBC Framework

Answer 11

• tool to monitor insolvency risk and protect policyholders
• an objective measure of insolvency risk that facilitates cross-company comparisons
• a provision for regulators to take corrective action if necessary