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Exam 6 > NAIC Solvency > Flashcards

NAIC Solvency Flashcards

1
Q

List the US Insurance Regulatory Mission:

A

Protect the interests of the policyholder and those who rely on the insurance coverage provided to the policyholder first and foremost, while also facilitating the financial stability and reliability of insurance institutions for an effective and eficient
marketplace for insurance products.

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2
Q

What approach did regulators determine is the best way to achieve this Regulatory Mission:

A

Combining Financial Regulation and Market Regulation

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3
Q

3 stages of Financial Regulation:

A
  1. Mitigate/ eliminate risks via restrictions on insurer’s activities
  2. Use financial tools and oversight to work with insurers to implement corrective actions
  3. Provide a backstop of financial protection in the event of a receivership
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4
Q

List & briefly describe 3 types of receivership:

A
  1. conservation = safeguard the insurer’s assets while the regulator determines the best course of action
  2. rehabilitation = a tool to fix the problems, protect the assets, run off the liabilities or prepare for liquidation
  3. liquidation = identify the creditors & distribute the assets
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5
Q

Briefly define “Market Regulation”:

A

Analysis/ oversight of insurer’s behavior in the market.

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6
Q

What do regulators look at during Market Regulation:

A
  • Treatment of policyholders & claimants in product development & pricing
  • Competition
  • Statistical reporting
  • Administration of residual markets
  • Licensing of insurance producers
  • Consumer assistance & information services
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7
Q

List some factors that influence the “optimum level of regulation”:

A
  • Costs & benefits of regulation
  • Fair & equitable treatment of insurance consumers
  • Financial stability & reliability of insurance institutions
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8
Q

List some factors that we can consider when assessing the level of regulatory success:

A

-Frequency & extent that the regulation helped by identifying and correcting the insurer’s problems before they caused
harm to policyholders and claimants
-Frequency of insolvencies, and payments to policyholders in those insolvencies
-Effective & efficient rehabilitation actions
-Market health
-Levels of competition
-Perceived and actual cost-benefit of regulation

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9
Q

List 3 points to support the argument that the US regulatory system has been “successful”:

A
  1. There is a strong track record of protecting consumers and overseeing solvency
  2. There is a strong depth & breadth of the US insurance industry
  3. Capacity of the insurance guaranty system
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10
Q

List the components of “Requisite authority”:

A
  • Legal basis
  • Independence & accountability
  • Adequate powers
  • Financial resources
  • Human resources
  • Legal protection
  • Confidentiality
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11
Q

How can regulators effectively regulate in a market as big as the US insurance market:

A

Regulators need to adopt a risk focused approach, where they focus on the greatest risk that insurers are exposed to.

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12
Q

List 2 unique features of US insurance regulation:

A
  1. Extensive system of peer review, communication & collaborative effort: commissioners can question the actions
    of another DOI and pressure that DOI to act.
  2. Diversity of perspectives results in centrist solutions:
    Overregulation harms consumers, whereas under-regulation harms consumers & taxpayers.
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13
Q

7 core principles of the US Insurance Financial Solvency:

A
  1. Regulatory Reporting, Disclosure & Transparency
  2. Off-site Monitoring & Analysis
  3. On-site Risk focused Examinations
  4. Reserves, Capital Adequacy and Solvency
  5. Regulatory Control of Significant, Broad-based Risk-related Transactions/ Activities
  6. Preventive and Corrective Measures, including Enforcement
  7. Exiting the Market and Receivership
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14
Q

Briefly describe Principle 1 (Regulatory Reporting, Disclosure & Transparency):

A

Insurers regularly provide standardized financial reports to regulators to help assess risk & financial condition.

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15
Q

List some qualitative disclosures contained in the reports provided to regulators:

A
  • Interrogatories
  • Notes to the Financial Statements
  • Management’s discussion & analysis
  • SAO
  • Annual Audit Opinion (from the CPA)
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16
Q

Why are insurers subject to “market discipline”:

A

Insurance reporting is very transparent: consumers can access the annual & quarterly statements. The market discipline
will arise from analysis by the industry, financial markets and public.

17
Q

Main purpose of off-site solvency monitoring:

A

Assess the financial condition of the insurer on an on-going basis, and also to identify & assess current & prospective risks.

18
Q

What type of information do regulators use in the off-site monitoring (in addition to the regulatory financial reports and financial tools):

A
  • the CPA audit report
  • results of the most recent on-site regulatory financial exam
  • SEC lings
  • Corporate reports
  • Financial statements of controlling companies
  • Market conduct reports
  • Rate and form filings
  • Consumer complaints
  • Independent rating agency reports
  • Correspondence from agents & insurers
19
Q

List some items that are evaluated during the onsite exams:

A
  • Corporate governance
  • Management oversight
  • Financial strength
  • Risk identication & mitigation
20
Q

In what cases can the regulators perform exams more often than every 5 years:

A

The regulators may perform more frequent exams of insurers who are subject to a higher level of financial risk. These more
frequent exams may focus only on a specific risk.

21
Q

2 purposes of the onsite exams:

A
  1. Evaluate the solvency of the insurers, based on the view of strengths & weaknesses
  2. Develop a prospective view of the insurer’s risks and risk management practices
22
Q

What type of information is included in the public exam report:

A
  • Assessment of financial condition
  • Details about any of the material adverse findings from the exam
  • May include required corrective actions/ improvements/recommendations
23
Q

2 reasons that the insurer needs to hold surplus in addition to reserves:

A
  1. The resources can cover the policyholder obligations in most future economic scenarios
  2. There are sufficient resources for the regulator to be able to suggest or take corrective action in the case that an adverse
    trend is detected
24
Q

List some transactions or activities that affect the policyholders’ interests that require regulatory approval:

A
  • Licensing requirements
  • Change in control
  • Dividends
  • Transactions with affiliates
  • Reinsurance
25
Q

Purpose of the preventative/ corrective measures that regulators can take, based on the risks identified during the onsite and offsite regulatory monitoring:

A

Correct problems to prevent insolvencies

26
Q

List some preventative/ corrective measures that regulators can take, based on the risks identified during the onsite and osite regulatory monitoring:

A
  • Requiring the insurer to provide an updated business plan
  • Requiring the insurer to file interim financial reports
  • Prohibiting the insurer from certain investments or investment practices
  • Restricting/ suspending the business that can be written/renewed
  • Ordering an increase to the capital & surplus
  • Ordering the insurer to correct corporate governance practice deficiencies
  • Requiring replacement of senior management
  • Seeking a court order to place the insurer under conservatism/rehabilitation/ liquidation
27
Q

2 reasons that Receivership laws exist:

A
  1. Prevent insolvencies

2. Minimize losses and protect policyholders before/ during an insolvency

28
Q

List 4 alternatives to the insolvency that regulators will consider:

A
  1. Mergers or acquisitions
  2. Reinsurance arrangements
  3. Non-renewal of part/ all of the business
  4. Placing the insurer into run-off mode
29
Q

The US financial regulatory system consists of a 3 stage process. List the 3 stages:

A
  1. Regulators limit/ eliminate risks via restrictions/ prior approval requirements
  2. Financial oversight
  3. Regulatory backstops and safeguards (eg guaranty funds and RBC)
30
Q

Why did regulators begin to oversee and restrict insurer investments:

A

In the 90s, several insolvencies were caused by high risk investments. To help reduce the insolvencies, regulators began to oversee and restrict insurer investments:

31
Q

Compare the “defined limits approach” to the “defined standards approach”:

A
  • Defined limits approach: limits on the amount that can be invested in different assets.
  • Defined standards approach: insurers need to follow a “prudent person” approach, where they are given more flexibility, as long as they follow a sound investment plan.
32
Q

What is the most common cause for regulator intervention in the operation of the insurer:

A

Hazardous financial condition

33
Q

List some factors that may lead a regulator to believe that a company is in hazardous financial condition

A
  • Adverse findings in financial analysis or exams/ audit/actuarial opinion/ cash flow & liquidity analyses
  • Insolvency of the insurer’s reinsurer, or within the insurer’s insurance holding company system
  • Finding of incompetent or unfit management
  • Failure to provide (accurate) information
  • Any other finding determined to be hazardous to policyholders, creditors or general public
34
Q

3 goals of assessing the financial condition of an insurer:

A
  1. Identify potential adverse financial indicators as quickly as possible
  2. Evaluate & understand the problems more effectively
  3. Develop corrective action plans sooner, in order to decrease the frequency & severity of insolvencies
35
Q

3 components of the risk focused surveillance by regulators:

A
  1. Financial analysis
  2. Financial examination
  3. Supervisory plan development
36
Q

List 4 priorities of SMI:

A
  1. Create a document that articulates the US insurance regulatory system
  2. Examine international developments for potential use in the US
  3. Comply with International Association of Insurance Supervisors (IAIS) & Insurance Core Principles (ICP)
  4. Apply lessons from the global financial crisis
37
Q

What does the federal Nonadmitted and Reinsurance Reform Act (NRRA) prohibit:

A

Prohibits a state from denying credit for reinsurance, if the domiciliary state:

  • Has recognized credit for reinsurance, and
  • Is an NAIC accredited state
38
Q

List another rule listed in NRRA:

A

Assigns the domiciliary state the sole responsibility for regulating the reinsurer’s financial solvency.

39
Q

List some criteria that reinsurers need to meet to be eligible for/ maintain certification:

A
  • Financial strength
  • Timely claims payment history
  • Requirement that insurer is domiciled & licensed in a “qualied jurisdiction”

Exam 6 (46 decks)

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