Porter 11 Flashcards
List 4 regulatory activities to ensure solvency
- maintaining a uniform system of financial reporting (annual statement)
- monitoring insurer solvency (financial examination)
- monitoring capital adequacy though RBC
- accreditation of state insurance departments
3 advantages that the RBC model provides
- system provides consistency among states regarding capitalization requirements
- capitalization requirements reflect an estimate of the actual risks to which an insurer is exposed
- it also establishes specific requirements for both regulators and insurers if required capitalization levels not maintained
Examples of provisions that accredited states must adopt in their Laws & Regulations
- regulator’s authority to examine insurers whenever necessary
- minimum capital & surplus requirement
- diversity and liquidity requirements for portfolios
- minimum standards for reserves
- required annual audits by independent CPAs
Examples of measures that the Regulatory Practices & Procedures address for accredited states
- financial analysis
- financial exams
- communications with states
- reporting of regulatory actions
Examples of Organizational and Personnel Practices of the DOI
- DOIs have sufficient staff to be able to examine all insurers periodically
- staff who are regularly involved in financial regulation should undergo periodic performance reviews
- DOIs should require minimum education and experience levels, provide competitive pay, and provide funding for staff to travel to NAIC meetings and training sessions
Explain why solvency regulation is more important for insurance than other industries
The insurance product is a contractual guaranty of future financial performance, contingent on occurrence of insured event resulting in loss, sold for a specific price. Insurance transactions involve a considerable amount of risk. As the likelihood of insurer insolvency increases, the risks retained by the insured and others also increase.
Identify two objectives of an effective examination system
- detecting as early as possible those insurers in financial trouble and/or engaging in unlawful and improper activities
- developing information needed for timely, appropriate regulatory action
Identify 3 consequences insurance consumers may face from the insolvency of an insurance company
- costs spread to entire industry - assessments of guaranty funds
- insured often lose premiums paid for coverage not yet provided
- delay in claim payments
Define the terms “technical insolvency” and “bankruptcy”
Technical insolvency: cannot pay the bill when due
Bankruptcy: Liability > Asset
Provide one example of when an insurer would be considered insolvent but not technically insolvent or bankrupt
When it has capital below the minimum capital requirements (did not meet RBC requirements) but still pay the bills and assets > liabilities
Briefly describe 2 types of risk usual to all business
- business risk - firm’s inability to maintain a competitive position and stable growth in earnings
- financial risk - firm’s inability to cover fixed debt obligations as they become due
State two types of risk unique to insurance
- price inadequacy
- reserve error
- underwriting risk
Briefly describe Full Scope, Limited Scope, and Special Association Examinations
Full Scope:
- very broad and encompass a thorough review of insurer’s records and financial position
- emphasis laced on risk-based analysis to identify potential problems
Limited Scope:
- should be scheduled between regularly scheduled full scope exams
- occur when regulator needs to validate info or review operations in response to requests by other regulators or unusual complains
Special Association:
- circumstances justify direct intervention by the NAIC
- generally 3 situations:
- written reports from zone examiners indicate examination conducted by state of domicile inadequate
- domiciliary state is reluctant to schedule and exam when IRIS results or other info indicate need
- state in which company is licensed requests it
Describe 4 reasons for insurance regulation related to solvency concerns
- there are risks inherent in the insurance product. Since costs are unknown in amount and in timing, risk of becoming insolvent in misplacing is very high
- opportunities to mismanage financials of company exist to greater extent in insurance than in other industries. Large inflows of cash from premiums need to be properly invested to ensure outflows at uncertain times and in uncertain amounts are sufficiently supported
- consumers’ general inability to evaluate insurers’ financial condition and long-term viability due to complexity of insurance industry
- insolvencies affect all market participants - assessments passed on in the form of higher rates for all or may cause more insolvencies if the insurer can’t pass it on
Identify the 4 dimensions of an insurer’s financial condition that IRIS ratios are designed to evaluate
- overall financial condition
- profitability
- liquidity
- reserves
