NAIC US Ins Reg & Solvency Flashcards
2 goals of insurance regulation
2 types of regulation within the regulatory framework
- protect policyholders
- insurer financial stability & reliability
by combining
- financial reguilation
- market regulation
Financial regulation 3 stage process
- mitigate – minimize risks from the beginning
- financial oversight – use tools to spot weak insurers + uniform reporting to compare across companies
- insolvency backstop – receivership & state guaranty funds
What is market regulation
what does it focus on
market regulation oversight of insurer’s behavior
focus
treatment of policyholders
competition
statistical reporting
licensing
consumer assistance
Market regulation techniques (6)
onsite exams
date analysis
correspondence
interviews
interrogatories
questionnaires
Criteria for evaluating success of solvency regulation (5)
- insolvency frequency
- prevented insolvencies (not all)
- cost vs benefit
- effective rehabilitation – fix weak companies
- overall level of market competition
Potential impact of over-regulation vs. under-regulation
over-regulation: cost is passed to consumers (eliminating all insolvencies would be too costly)
vs. under-regulation: insolvencies cost taxpayers & consumers
Describe US regulatory system for insurance companies
national system of state based solvency tests
( erformed by each state DOI & commissioner)
7 US Insurance Financial Solvency Core Principles POORER-C
- Prevention & correction (restrict NB, require business plan)
- Off-site monitoring & analysis – (sec filings, rate filing, rating agency reports)
- On-site exam- (risk focused – focus on higher risk companies, examine management&financial strength)
- Reporting – (standarized financial statements)
- Exiting market – (receivership& guaranty funds)
- Regulatory control of risky transactions
- Capital adequacy – (RBC)
Preventative & corrective actions regulator can take (4)
- restrict/reduce new or renewal business
- restrict/reduce certain investments
- require business improvement plan (CAL RBC 150-200)
- require financial reports
Hazardous financial conditions of insurer
- adverse results in examinations or financial analysis
- insolvency of holding co or reinsurer
- bad management
- providing inaccurate info
Actions an at-risk insurer can take to avoid insolvency
- Buy reinsurance
- Exit LOB
- Raise rates
- Tighten UW
3 stages to oversight in ‘Financial Surveillance Program’
designed to do?
limiting risk via system design: investment requirements & limits
financial oversight & intervention Powers: intervene if see hazardous financial conditions such as adverse results in examinatin or insolvency of holding company
Regulatory Backstop: RBC calc & formula
not designed to eliminate all insolvencies but rather minimze number & effect on consumers
Requirements of NAIC Own Risk and Solvency Requirements (ORSA) Guidance Manual (3)
Maintain risk management framework
Regularly conduct ORSA
Submit ORSA report to state commish
Justify limited regulation of reinsurers historically
Reinsurer & primary has equal negotiating leverage & product knowledge
credit for reinsurance is given to primary under 2 scenarios
why is credit given so easily?
- Reinsurer licensed in USA
- reinsurer NOT licensed in USA BUT posted collateral in USA
avoid the various foreign country regulations
Recomendations and goals of NAIC adoption of ‘Reinsurance Framework’ (2)
rec 1 = Proposed federal legislation (Reinsurance Regulatory Modernization Act) but did not pass
goal 1 = Uniform regulation across all states
rec 2 = facilitate cross border reinsurance transactions
goal 2= promote competition + protect insurers/policyholders from reinsurer insolvency
Non-Admitted & Reinsurance Reform Act of 2010 (part of Dodd Frank) (3)
- Credit for reinsurance - a state can NOT deny credit IF primary’s domiciliary state granted the credit
- Insolvency regulation - reinsuer’s domiciliary state is given full responsibility
- Collateral reforms - states may proceed
NAIC adopted Credit for Reinsurance Model Law & Credit for Reinsurance Model
what did it do (2)?
Collateral requirements; reduce collateral if certified (based on financial strength, timely claim payments, license in qualified jurisdiction)
Certification: States can certify insurer OR use other state’s certification
why not add cat risk charge to RBC?
modeling approach has higher costs
modling approach can’t be compared acorss companies
RBC formula can be compared across companies and easy to calculate
