Porter 12 Flashcards
Identify 4 factors that contribute to insurer insolvencies
- rapid premium growth
- inadequate rates and reserves
- unusual expenses, such as unexpected catastrophic losses
- lax controls over managing general agents
- reinsurance uncollectible
- fraud
Briefly describe the disposition of an insolvent insurance company
Commission to appoint special deputy liquidator to act as his agent in day-to-day
- has broad powers to seize and dispose of insurer’s assets, hire and fire personnel, enter contracts and lawsuits, and manage affairs of company
- freeze and quantify the insurer’s liabilities
- marshal the assets and convert them to cash
Years after all claims have been filed and adjudicated and all assets reduced to cash, they are distributed in specific order to different classes of creditors
2 triggers and 8 actions for Mandatory Corrective Action (NAIC Hazardous Condition Regulation)
Triggers:
- fact finding by regulator indicates policyholders may be at risk
- poor results on financial examinations
Actions:
- increase level of reinsurance
- tighten underwriting acceptance
- reduce expenses
- increase its capital and surplus
- suspend or limit dividend payments
- limit or withdraw from specified investments
- file reports concerning the value of it’s assets
- document the adequacy of its premium rates
2 triggers and 8 actions for Administrative Supervision (Model Supervision Act)
Triggers:
- Mandatory Corrective Action fails
- financial conditions are worse than previous level
Actions:
Insurer will need regulator’s approval for the following:
- selling or transferring assets or in force business or using 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
Describe receiverships
- financial difficulties are so severe that more than supervision is needed, final regulatory action is to place insurer in receivership
- a type of bankruptcy where the commissioner becomes the receiver, and formulates a plan to distribute the insurer’s assets to settle obligations to customers
Which factor precedes nearly all of the major failures and why?
- rapid premium growth
- reduces the margin for error in the operation of insurers
- usually indication of bargain rates and lax underwriting standards
List the 3 levels of regulatory action to control financial difficulties
- mandatory corrective action
- administrative supervision
- receiverships, rehabilitation, and liquidation
Briefly describe two benchmarks of regulatory performance
- low insolvency rate
- extent to which regulation increases expenses and restricts products
Describe 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
- generally a prelude to liquidation
- regulator operates insurer in best interest of insureds and creditors
- rehabilitator is commonly a retired industry executive or lawyer
- first challenge is to stabilize cash flow and protect assets from the claims or creditors
Describe Liquidation
- bankruptcy preceding 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
- sells the insurer’s assets and terminates the insurer’s business
Identify 3 possible solutions for dealing with the complexity of interstate insolvencies to reduce redundant work and improve the consistency of the treatment of policyholders
- NAIC reforms
- interstate compacts
- federalization
