porter 12 - insolvency regulation

Question 1

Reasons for insolvency GoNGS (5)

Answer 1

1. Governance – poor management
2. o
3. New Entrant - inexperience
4. Growth – too rapid to absorb losses
5. Size – too small to absorb losses
6. Low rsvs or low prices

Question 2

2 mains steps of state DOI regulatory intervention

Answer 2

1. Fact Finding (RBC, IRIS, financial statements)
2. Select level of regulatory action MAR (Mandatory corrective action, Administrative supervision, Receivership)

Question 3

3 levels of regulatory action (MAR)

Answer 3

1. Mandatory corrective action
2. Administrative supervision
3. Receivership

Question 4

Reasons to be subject to Mandatory Correction Action (3)

Answer 4

1. RBC<150% (regulatory action level or below)
2. Unusual IRIS ratios
3. Regulatory judges that policyholders are at risk

Question 5

Reasons to be subject to Administrative supervision (4)

Answer 5

1. Mandatory corrective action fails
2. RBC<100% (authorized control level or below)
3. More Unusual IRIS ratios
4. Regulatory judges that policyholders are at risk

Question 6

Reasons to be subject to Receivership (bankrupt) (2)

Answer 6

1. Both Mandatory corrective action and Administrative supervision fails
2. Regulatory judges insurer cannot manage operations

Question 7

Regulator actions under Mandatory Correction Action (3)

Answer 7

1. Restrict new or renewal business
2. Require liability reduction and/or capital increase
3. Require submitting financial plan

Question 8

Regulator action under Administrative supervision

Answer 8

1. Regulator must give consent to do anything (incur debt, write NB, buy reinsurance)

Question 9

Describe Receivership (bankrupt)

Answer 9

1. Receiver = state commish
2. Receiver formulates plan to distribute assets
3. Receiver ensures insureds are fulfilled as much as possible

Question 10

possible outcomes of receivership are Rehabilitation & Liquidation

Rehabilitation vs Liquidation

Answer 10

rehabilitation: Reorganization of operations to at least partially meet obligations

vs. liquidation: bankruptcy & distributions of assets to creditors (guaranty fund)

Question 11

Rehabilitation

Answer 11

Receiver = state commish finds investor or other insurer to stabilize cash & protect assets, if assets can’t cover liab then liquidate

Question 12

Liquidation

Asset Distribution Priority

Answer 12

Business goes to other insurer or guaranty fund

asset distribution priority

a) cost to liquidate
b) debt (for servcies rendered with in 1 yr of liquidation)
c) incurred claims
d) UEP

Question 13

State guaranty fund defined

Answer 13

1. Fund administered by each state to protect policyholders in insolvency

Question 14

How State guaranty funded

Benefits included

Benefits excluded

Answer 14

funded: Post-insolvency assessment – each licensed insurer in the state is assessed % of NWP based on market share & shortfall (passed onto consumers in premium)

benefits: Refunds a) outstanding claims up to a limit & b) UEP up a limit

(refund capped on a per year basis –> therefore multi-year assessments possible)

exclusions: Only protects licensed insurers & certain LOB (NOT reinsurers & surplus line)

deductible per claim over policy deductible

Question 15

Why strong insurers prefer strong solvency regulation?

Answer 15

Strong insurers are assessed IF weak goes insolvent

Question 16

Consequences of eliminating guaranty funds

policyholders

vs insurers

vs regulators

Answer 16

policyholders: Less protection if insolvent

insurers: no assessments → more profit

regulators: need stricter regulation

Question 17

Why guaranty fund not good solvency backstop (4)

Answer 17

1. Reduces incentive for policyholders to pick strong insurers
2. Reduces invective for regulator to shut down weak insurers
3. Costs are passed on to policyholders in premium
4. Distorted competition (weak insurers lower prices to grow)

Question 18

Argue for vs against tougher solvency regulations

Answer 18

for: protect policyholders

vs against: insolvencies are rare + already protected by guaranty funds + regulation is burdensome

Question 19

Calculate

a) DEF guaranty fund assessment
b) policyholder assessment if ABC goes insolvent w/ 150m assets short fall, (DEF prem = 2B, ZYZ prem=8B)

Answer 19

DEF assessment = [2/(2+8)]*150m=30m

Policyholder assessment = 30m/2B=1.5% as % of premium in year 1 (multi -year assessment if state has cap below 1.5%)

Question 20

Actions to save weak insurer w/o outside parties noticing (2)

Answer 20

1. Capital infusion
2. Merger

Question 21

Suggested solutions to keep multi-state insurers from going insolvent (3)

Answer 21

1. NAIC reform – uniform data reporting procedures
2. Interstate compacts – agreements among states
3. Federalization – uniform national solvency regulation