Porter 12 Insolvency

Question 1

Causes/warning signs for insolvencies

Answer 1

GoNGS
* Gov: poor Governance (CEO sucks)
* N: New entrant to market (inexperienced management, lower capital)
* G: Growth too rapid (get premiums up front, but the trouble starts when the losses start rolling in)
* S: Size too small (can’t absorb unexpected losses)

Question 2

2 main steps of state DOI regulatory intervention

Answer 2

Fact-finding:
* examine insurer using resources such as financial statements, RBC, IRIS
* regulator must also use expert judgment since there may also be qualitative warning signs

Select appropriate regulatory action

Question 3

3 levels of regulatory action the state DOI may impose on financially weak insurers

Answer 3

MAR
* Mandatory action level
* Administrative supervision
* Receivership (a type of bankruptcy)

Question 4

What reasons would cause an insurer to be subject to the regulatory actions?

Answer 4

Mandatory action level
* RBC < 150% (Regulatory Action Level or below)
* multiple IRIS ratios outside acceptable ranges
* judgment by regulator that policyholders are at risk

Administrative supervision
* mandatory corrective actions FAIL
* RBC < 100% (Authorized Control Level or below)
* further deterioration in IRIS ratios
* judgment by regulator that policyholders are at risk (regulator has wide discretion)

Receivership
* mandatory corrective actions & administrative supervision FAIL
* regulator judges that insurer is wholly incapable of managing its operations

Question 5

What actions is the regulator authorized to take for each action level

Answer 5

Mandatory action level
* regulator requires insurer to submit financial improvement plan
* regulator requires reduction in liabilities (and/or increase in capital)
* regulator places restrictions on new/renewal business

Administrative supervision
* regulator must give consent for insurer to incur new debt
* regulator must give consent for insurer to issue new policies
* regulator must give consent for insurer to purchase reinsurance
* regulator must give consent for insurer to do basically anything “important”

Receivership
* a process in which a legally appointed receiver acts as custodian of an insurer’s assets & operations
* has full discretion in managing insurer’s assets
* specific actions open to the receiver are: rehabilitation and liquidation

Question 6

Describe rehabilitation & liquidation

Answer 6

Rehabilitation:
* reorganization of an insurer’s operations so that obligations can at least partially be met with future earnings
* may require external capital investments to stabilize operations
* liquidation usually follows

Liquidation:
* closure and distribution of assets to creditors in priority order

Question 7

What is a state guaranty fund?

Answer 7

• a fund adminstered by each state to protect policyholders in an insolvency
• the fund pays most outstanding claims and refunds most unearned premiums (subject to limitations)

Question 8

How does a state guaranty fund work?

Answer 8

• funded by all insurers licensed in the state
• solvent insurers pay roughly 1-2% of NWPs in assessments to the fund
• fund members elect a board of directors (approved by state insurance commissioner)
• protects only policyholders of licensed insurers (surplus lines not covered)