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Exam 6U (Personal) > Porter > Flashcards

Porter Flashcards

1
Q

Which state had the 1st DOI and which state was first to be chartered?

A

New York in 1859
Pennsylvania in 1792, many others by 1797
chartered under the British Crown….

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2
Q

Regulation in the early 1800s

A

regulated by states in which the charter was obtained in
different regulations by state

agents could sell in other states if informaton was on file about that insurer in that state

felt pressure to protect domestic insurers from British insurers entering the market

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3
Q

How was NY a leader in regulating insurance?

A

Established a process for managing liquidation of insurers
imposed 10% retaliatory premium tax for fire insurers from other states
Filing of annual statements (Comptroller ensures solvency)
Required UEPR
in 1859 created DOI

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4
Q

Paul v Virginia (1869)

A

Supreme court reviewed constitionality of VA licensure law
Paul applied to be agent in home state VA for NY insurer
he got denied (no foreign insurer bond), sold anyway = arrested
appealed conviction which…
- affirmed lower court ruling
- insurance is contract delivered locally, not interstate commerce
- states CONTINUE to regulate insurance

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5
Q

National Insurance Convention (1871)

A

-States not happy with Paul decision, more operating in many states
-issues with meeting state demands (varying regulations)
-first meeting of NAIC

NIC did this…
- consititution for regulator goals
- uniform accounting statement
- guidelines for taxes
- adopted 1st model law (commissioners duties, regulation)

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6
Q

Evolution of multiline insurers

A

in Early 1900s, DOIs didn’t allow multiline insurers (auto,prop)
- insureds needed policies from 2 separate insurers
- package policies from 2 insurers (sharing P/L)
- finally allowed in 1945, 1930s disapproved still
before that…
- company sold via subsidiaries

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7
Q

Industry before the SEUA case

A

1800s = fierce competition / insolvencies => insurer compacts
Late 1800s, little corporate reg, unethical behavior led to
Sherman (not apply to insurers) …..
made insurers pass their own anti-trust laws (no compacts)

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8
Q

When were anti-compact laws repealed (by states)?

A

regulators wanted to stop ineffective competition = > insolvencies

1923 NCIC passed resolution to repeal anti-compact laws
this led to formation of SEUA

Insurers NEED! to cooperate in setting rates, its the nature of the business

NCIC = National Center for Interstate Compacts

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9
Q

Indictments on SEUA

A

• Continuing agreement and concert of action to take control
of 90% of the fire & allied lines market
• Fixing premium rates and agents’ commissions
• Using boycott and other forms of coercion and intimidation to
force non-SEUA members to comply
• Withdrawing rights of agents to represent SEUA members if
they also represented non-SEUA companies
• Threatening insurance consumers with boycott and loss of
patronage if they didn’t purchase insurance from SEUA
members

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10
Q

SEUA Decision (1944)

A

Initially dismissed bc Paul v Virginia ruling
Ruling….
- insurance is interconnected
- only 18/200 SEUA were domiciled in the 1/6 states
- no other business is beyond Congress powers
- other intangibles, telegraph, subject to Congress

Now, federal reg applies to insurance (Sherman/Clayton, Robinson)

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11
Q

2 Key questions for SEUA case

A

(1) Did Congress intend the Sherman Act to prohibit insurer’s
conduct of restraining/ monopolizing business?

(2) Do insurance transactions across state lines constitute
“commerce among several states”, which will subject them to
Congressional regulation?

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12
Q

Sherman Act (1890)

A

prohibits collusion to attempts to gain monopoly power
- any act that restricts trade/commerce = illegal
- e.g. boycotting / intimidation / coercion

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13
Q

Clayton Act (1914)

A

ID’d and prohibited practices that either lessen competition or create monopolies
T ying
E xclusive deadlings
M &A that lessen competition
P rice discrimination
O ne director at multiple companies

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14
Q

What did the subcomittee on federal legislation recommend post SEUA?

A

-pressure Congress to enact Legislation under commerce clause to give states authority back
-amend sherman/clayton to allow cooperation in rate setting
-FTC act / robinson amended to exclude insurance

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15
Q

McCarran - Ferguson (1945)

A

-returned authority to states, in public interest
-states had until 1948 to regulate insurance to limit federal regulation

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16
Q

Exceptions to MF

A

-if states are not regulating, federal takes over
-sherman applies for intimidation/coercion/boycotting
-applicable federal law&raquo_space;> state insurance law

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17
Q

Post MF

A

NAIC & state legislatures developed laws to
- allow rate cooperation
- keep congress from interfering
NAIC passed 2 model bills to
- rates not excess/unfair discrim / inadequate
- rate cooperation, as long no hinder competition
Required prior approval of rates, explained filing, said how rating orgs helped, recommended anti-rebate laws

STATES DONT HAVE TO ADOPT THESE LAWS, and many did not

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18
Q

NAIC Unfair Methods of Competition (1947)

A

-preempt application of FTC to insurance
what is unfair or deceptive? (BIC- FURD)
- boycott
- intimidation
- coercion
- false info & financial statements
- unfair discrimination
- rebating
- defamation

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19
Q

What are regulators most concerned about post MF?

A

-insolvencies
-unavailable coverages
-inequitable treatment of consumers

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20
Q

Guaranty Association Model Act (1969)

A

-created state guaranty funds

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21
Q

NAIC 1971 - Early Warning Tests Program

A

-renamed to IRIS in 1977
-to prevent need for guaranty fund assessment by taking over
insurers and returning them to capacity or merging

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22
Q

NAIC Model Accreditation Program

A

1989
-created similar solvency standards in all states

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23
Q

FAIR

A

-insurance pool where private insurers address unmet need for property ins, on a state level
-1968, loss by riot or civil commotion

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24
Q

LRRA 1981

A

Products Liability Risk Retention Act - FEDERAL
-address unsafe products, regulatory uncertainty, questionable price/reserving practices for PL, especially medical malpractice

-allowed RRGs to form

-pool of companies, similar exposures
-regulated via NAIC Accreditation
-no guaranty funds
-can use GAAP, no rate filing, but normal financial reporting
-only licensed in domiciliary state

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25
Q

Key area where surplus lines is NOT regulated.

A

rates and forms…
meaning it can quickly adapt to consumer needs

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26
Q

Key surplus lines attributes

A

-only specially licensed producers
-insurers need to meet financial and managerial reqs
-diligent search must be performed in admitted market, UNLESS…
ECP + other applicable rules

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27
Q

What laws apply to surplus lines?

A

-need a surplus lines broker
-domiciliary jurisdiction reviews for solvency
-surplus lines licensing needs P&C standard license
capital reqs usually over 15m
often reqs to be licensed in 1+ other states, need to be multiple years

NO GUARANTY FUNDS!!!!!!

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28
Q

Gramm - Leach - Bliley Act Background

A

in 90s, affiliations bw insurers and banks caused questions abt who regulated (banks = federal, insurance = state)

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29
Q

GLB Financial Services Modernization Act (1999)

A

-prohibits state from preventing banks from selling insurance
- UW != (sales + marketing) =>
-banks can’t form subsidiary to UW insurance (make it harder for bank to use insurer assets to avoid insolvency)
-reqs bank to disclose info sharing policies (can lead to inconsistency in practice)
-makes states faciliate producers ability to operate in 2+ states => NAIC Producer Licensing Model Act

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30
Q

GLB Concerns

A

-privacy of info
-ability of states to serve global financial market adequately
-consumers need or desire for integrated services

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31
Q

NAIC Producer Licensing Model Act

A

requires states to establish either a system of reciprocal producer licensing or uniform licensing standards

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32
Q

3 Circumstances where state laws are void under U.S Constitution

A

-state law contradicts a federal
-courts determine state law interferes with purpose/results of a federal but not contradict
-imposes improper burden on interstate commerce

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33
Q

Business of Insurance Definition Evolution

A

U.S vs SEUA (1944) - fixing rates is part of it
Robertson vs Cali (1946) - licensing of comp/agent is part
FTC v National Casualty Co (1958) - selling/advertising is part of it
SEC vs Variable Annuity Life (1959) - variable annuities not part
SEC v National Sec (1969) - company/stockholder relationship != insurance
Group Life & Health vs Royal Drug (79) - mccarran exempts BOI, not insurance companies
Union Labor Life vs Pireno (82) - three criteria from group life not enough, must be reviewed case by case

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34
Q

Business of Insurance def post- SEC v National Securities Inc (1969)

A

⇒ Relationship between insurer and insured
⇒ Types of policies that can be issued
⇒ Reliability, interpretation, and enforcement of
policies

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35
Q

Business of Insurance def post- Group Life & Health (1979)

A

⇒ Spreading and underwriting of risk
⇒ Direct connection between insurer & insured
⇒ Activity needs to be exclusive to entities within the
insurance industry

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36
Q

What is the current def of the business of insurance?

A

Activity with 1+ of these
* Insurer spreads or underwrites the policyholder’s risk
* Insurer and the insured have a direct contractual agreement
* Activity is unique to entities within the insurance industry

receives protection from federal intervention (under MF Act)

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37
Q

Securities Act of 1933

A

prevent abuses of fraud,deceit, and misrepresentation in the sale of securities
market system so investors can gain knowledge on securities to buy/sell
stock orgs must register securities to sell (prospectus)

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38
Q

When/how was the SEC established?

A

in 1934, in conjunction with Securities exchange act of 1934 to help regulate U.S markets

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39
Q

Securities Act of 1934 requirements

A

annual reports to shareholders
5 yrs of financial data
managements discussion on liquidity/capital
income statements / cash flows / balance sheets (3,2 yrs)

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40
Q

Federal Taxes on insurers

A

apply general corporate tax rules
can deduct reserves

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41
Q

ERISA (1974)

A

stop abuse in private pension system + employee benefits
-employers took tax deductions for benefits employees didn’t get
- ERISA ensures participants are more informed
- also set greater standards, funding levels, protection to participants

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42
Q

How does ERISA impact insurance?

A

insurers that administer relevant benefit plans are subject to certain reponsibilities to plan fiduciaries
must also verify plan benefits and comply with ERISA

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43
Q

Miscellaneous Acts that apply to insurance

A

Civil Rights Acts
Age discimination in employment
older workers benefit protection act
americans with disabilities act

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44
Q

How does the FBI impact insurance?

A

-works to detect and prosecute fraid
-crime investigation, auto theft for example

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45
Q

How does the EPA impact insurance?

A

dictates exact wording in certain policies
can apply to surety bonds as well

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46
Q

How did the ICC (Interstate Commerce Commission) impact insurance?

A

policy forms must be prescribed & approved by ICC
iCC needs 30 days notice b4 cancelling policies
dictates minimum policy limits & conditions
-ABOLISHED AND REPLACED IN 1995

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47
Q

Briefly describe how courts impact insurers.

A

-decisions from cases can change regulation
-can impact DOI functions court can shut down regulator issued rule
-courts interpretation for one situation can affect all insureds
-court tested language usually helps insurer
-can influence claims settlement procedures

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48
Q

Contract of adhesion

A

⇒ Contract drawn up by only one party, insurer
⇒ Ambiguous language will be interpreted in favor of
insured

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49
Q

Doctrine of reasonable expectations

A

⇒ Insured’s reasonable expectation of coverage will be
honored

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50
Q

What are the functions of Insurance Trade Associations?

A

-provide services to insurers,agents,brokers
-prompt access to legislative developments
-continually watch for new regulations from state insurance departments
-exert influence on NAIC, state regulators
-give more accurate info on critical issues

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51
Q

What do insurance advisory organizations do?

A

-filing rates & loss costs
-develop rating systems
-collect & tabulate stats
-educate members
-monitor regulatory issues
-research important topics
-Actuarial Analysis

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52
Q

Consumer Groups

A

-PH may feel against insurance company
-help them tackle public interest issues
-PH complaints can trigger market conduct exams, basically make regulators force companies to do something

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53
Q

What consumer complaints have led to major legislation?

A

-redlining prohibitions
-unfair claims and trade practices laws
-FAIR plans
-tort reform
-high-risk drivers pools

54
Q

Source of State Insurance Law

A

-Legislative (House of rep & senate) - standard insurance code, statutory law creation => statutory law
-Executive - insurance department (enforces and adopts regulation) and attorney general => administrative law
Judicial branch - state court system => case law

55
Q

Briefly describe the four features that a typical state insurance regulatory system contains.

A

licensing reqs - need certificate of authority to write, need to be licensed 1st
reporting & filing reqs
periodic exams
power to post sanctions

56
Q

Describe NCOIL and its activities.

A

org of state legislators who care mostly about insurance

-improve regulation
-educating legislators on issues
-assist communications b/w state legislators

57
Q

2 Key ways state legislatures influence insurance regulation

A
  • Often directly control DOI budgets (performance reviews can affect this)
  • Pass the insurance laws that insurance commissioners must
    enforce
58
Q

How does legislature directly overlook insurance commissioners

A

-regulators submit periodic report to legislature
-commissioner submits annual report summarizing activities of dpt and status of industry which must…
- list insurers closed for that year
- names of companies in receivership
- recs by com about laws
- exhibit summarizing financial status of licensed insurers

59
Q

How does legislation affect insurers in non-insurance laws?

A

Banking
Contract law
Fraud (many DOIs have fraud dpts now)
Investments
Lobbying

60
Q

NAIC Purpose

A

established in 1871
Coordinate the regulation of insurers operating in multiple
jurisdictions
uniform financial reporting was 1st step

61
Q

NAIC 5 fundamental regulatory objectives

A
  • Protect the public interest
  • Promote competitive markets
  • Facilitate the fair and equitable treatment of insurance
    consumers
  • Promote the reliability, solvency, and financial solidity of
    insurance institutions
  • Support and improve state regulation of insurance
62
Q

How does NAIC help state regulators?

A
  • scrutinizing alien insurers
    -track insurance issues @ federal level
  • pricing and coverage help
    -valuing securites (securities valuation office)
    -maintain DBs to track financial adequacy (IRIS)
63
Q

NAIC leadership

A

annually elect a president, VP & secretary from among their members for one year terms

64
Q

How can model laws help state legislators?

A

NAIC researches and drafts model laws
-streamlines the process of new laws
-states can choose to adopt, or modify
-benefit from legal uniformity
-produced during NAIC national meeting

65
Q

Why might model laws not be adopted or changed?

A

-may view as inappropriate or unnecessary
-may modify to better match needs
-legislature considers many matters, NAIC not that important

66
Q

DOI Financial Accreditation

A

-NAIC basic standards for solvency regulation
Steps
-com submits request => NAIC
-NAIC review team visits dpt, interviews, reviews laws/prior exams, inspects regulatory files, gains understanding, and has closing conference to prepare a report

Financial Regulation Standards Accreditation Committee and Review Team decide together

67
Q

3 criteria to be accepted for Fin Accred

A

(LRD)
* Laws and regulations used by the state must meet certain
basic standards of NAIC models
* Regulatory methods of the state must be acceptable
* Department practices must be adequate

68
Q

Why do states have concerns about NAIC Accreditation?

A

⇒ May create resentment due to some legislators who
may feel accreditation usurps legislative authority
⇒ Additional and revised model law requirements
create a continual need for new legislation

69
Q

Who does the day to day regulation of insurance?

A

executive branch of government
-either separate department within the executive branch
or by a unit that is part of a larger group in the branch

70
Q

Regulatory Functions of DOI

A

-licensing for companies,agents,claims adj
-regulate pricing
-some states have no pricing laws, have legal power under powers and duties provision
even w/o prior approval, states can force withdrawal of rate/coverage

71
Q

List some common reasons for disapproval of filed rates.

A

not in public interest
illegal
unfairly discriminatory
other, excessive, inadequate, not min standards
Most states have prior approval

72
Q

What is the Financial Condition Examiners Handbook?

A

its used by all states to promote uniform financial exams

73
Q

How often are financial exams conducted?

A

every few years, varies in length based on financial condition, extent of exam and number of examiners

74
Q

Basic purposes for financial exams

A

⇒ Detect as early as possible those insurers in
financial trouble and/or engaging in unlawful and
improper activities
⇒ Develop the information needed for timely,
appropriate regulatory action

75
Q

What is reviewed in a financial exam?

A

statistical statements
accounting procedures
financial statements
financial controls
IRIS
investments

76
Q

Market Conduct Exams

A

Review how insurers do business
Market Conduct Examiners Handbook
-sales & advertising
-UW
-Pricing
-Claims

77
Q

How does DOI license producers?

A

May need to pass examinations and
pay fees to obtain licenses

May require that licensed agents and brokers meet continuing
education requirements and conflict of interest standards to maintain their licenses

78
Q

How does DOI regulate adjusters?

A

-practices covered in market conduct exams
-may be licensed through a test and CE
-may have law that com can examine their records

79
Q

1968 Omnibus Crime Control and Safe Streets Act

A
  • Made it illegal to defraud, loot, or plunder an insurer
  • Established a multi-state approach to anti fraud activity
80
Q

Before 1994, why did few states have fraud departments?

A
  • Restraints on budgets
  • Lack of insurance fraud laws
81
Q

What is a receiver?

A

disinterested person/business appointed to
receive, protect, and account for money or other property
due
a receiver appointment creates a receiver(ship)

82
Q

What might require an insurer undergo rehab efforts?

A
  • Liabilities exceed assets
  • Insurance company refused to submit books, records,
    accounts or affairs to insurance department
  • Insurer willfully violates its charter or any other state law
83
Q

What is the initial free surplus requirement?

A

Amount new stock insurer needs to provide ABOVE minimum capital

84
Q

What is the minimum required basic surplus?

A

Amount of surplus existing insurers need to continue writing

85
Q

What impacts the capital required to write business?

A

Lines of Business (more hazardous = more capital)
Ownership type (stock insurers lower cuz can issue stock, captives lower as well, repriocals higher)

86
Q

How are domestic insurers licensed?

A

regulator needs access to books and records (in- state)
usually required to have an in-state office (create jobs, easier access)
Exam….
min capital and surplus
good management
records in order
forms and rates have approval

87
Q

How are foreign insurers licensed?

A

better than start-up, gone through rigor of another state
2-3 yrs annual statements, recent financial exam copy
financial statements (SAP, maybe GAAP)
needs certificate of compliance from dom state
Holding insurer registration statement = if in holding system
cant shift business to affiliate in the new state

88
Q

Seasoning for foreign insurer licensing

A

⇒ Only experienced insurers are acceptable
candidates
⇒ Exceptions if insurer has substantial capital, owned
by an insurer with lengthy history, or if the
department is satisfied with the application for other
reasons
⇒ Prevent start-ups from engaging in multistate
licensing projects in initial years of operation

89
Q

Alien insurer licensing

A

need to select a state as port of entry for U.S branch establishment
needs data required for foreign insurer as well as
U.S manager
Trust agreement
Certificate of alien funds on deposit

90
Q

Briefly describe three ways methods to achieve goals are unique in insurance.

A

rates are set before costs are known
regulatory environment differs by state
has many information sharing and joint product development mechanisms

91
Q

Ocean Marine Regulation

A

little regulation
individualized risks
no statistical info
knowledgeable buyers and sellers

92
Q

Inland Marine Regulation

A

only informational filings
* Highly individualized risks
* No statistical info to justify rates
* Diverse coverages and classification

93
Q

Surety Regulation

A

rate manuals filed, little review
* Less detailed stat plan and ratemaking data
* Fewer statistically based rating factors
* Subjective risk evaluation
* Less credible loss experience

94
Q

Title regulation

A

filed, little review
* No stat plan or ratemaking data
* Few rating or risk evaluation factors
* Underwriting and exposure identification key to controlling
losses
* Driven more by business expense than by insured losses

95
Q

CGL Regulation

A

general regulation
-sophisticated buyers

96
Q

PPA Regulation

A

review rates/plan
* Legally required or socially desirable for consumers to
purchase
* Uninformed consumers
* Highly uniform stat plan with credible rate data
* Complex rates and classification system

97
Q

WC Regulation

A

close regulation, pripr approval of rates
* Legally required of most employers
* Costly, widespread business
* Complex rating and classification system

98
Q

Political Theory of Regulation

A

a. Partially explains the rate regulatory system
b. Regulatory attention can be greatest for issues that attract
substantial voter interest and are easy for policymakers to
understand

99
Q

P&C Ratemaking Principles

A
  1. A rate is an estimate of the expected value of future costs
  2. A rate provides for all costs associated with the transfer of risk
  3. A rate provides for the costs associated with an individual risk transfer
  4. A rate is reasonable and not excessive, inadequate, or unfairly discriminatory
100
Q

What do statistical agents do (examples)?

A

collect and report loss experience
examples. ISO, NCCI, NAII

101
Q

Have rating bureaus faced regulatory pressure?

A

Yes (Anti-Trust concerns) which led to
ISO (& others) stopped filing final rates in the 90s
only do loss costs and trends now

102
Q

What is a statistical plan?

A

formal set of directions for reporting losses (and possibly
expenses) to a statistical agent

103
Q

Briefly describe several functions of a rating bureau.

A

loss development
loss trending
developing classification systems and class relativities
make filings to DOI / develop forms / producing statistical reports to regulators

104
Q

What are the three levels to control financial struggles?

A
  • Mandatory corrective action
  • Administrative supervision
  • Receiverships, rehabilitation, and liquidation
105
Q

Questions surrounding Guaranty Funds

A

How effective is state regulation?
How much of the cost is passed on to PH and tax payers?
Do GFs diminsh the pressure on regulators to shut down insurers?
Does it make consumers less concerned about selecting good insurers?

106
Q

What is the greatest regulatory failure?

A

to allow liabilities to go unmatched by assets to pay for them

107
Q

State reasons for insurer insolvency.

A
  • Rapid premium growth
  • Inadequate rates and reserves
  • Unusual expenses, such as unexpected catastrophic losses
  • Lax controls over managing general agents
  • Uncollectible reinsurance
  • Fraud
    always rapid premium growth
108
Q

NAIC Model Act on Rehab discreet intervention

A

knows mergers and acquisitions can cover up bad operations, NAIC can intervene discreetly

109
Q

2 Key steps in regulatory intervention

A

a. Fact finding
b. Implementation of regulatory action to control financial difficulties
facing insurers

110
Q

What does ‘fact finding’ entail?

A

regulators from multiple states examine an insurer
IRIS + FAST != intervention, judgement is needed
management has actuaries / accountants to assist in preparing, evaluating, and auditing financial reports, SAO needed

111
Q

Describe Mandatory Corrective Action as promulgated in NAIC Hazardous Condition Regulation

A
  • Perform certain actions to reduce its liabilities
  • Limit its new or renewal business on products that are not
    guaranteed renewable
  • Reduce its general and commission expenses by specified
    methods
  • Increase its capital and surplus
  • Suspend or limit dividend payments to stockholders /
    policyholders
  • Limit or withdraw from specified investments
  • File reports concerning the value of its assets
  • Document the adequacy of its premium rates
112
Q

Describe Administrative Supervision as promulgated in Model Supervision Act

A
  • can seek approval from court to take formal control, to rehab
    needs legal permission to… (do anything important!)

⇒ Selling or transferring assets or inforce business or
using them as collateral
⇒ Withdrawing, lending, or investing funds
⇒ Incurring debt
⇒ Accepting new premiums
⇒ Renewing policies that are not guaranteed for
renewal
⇒ Merging with another insurer

113
Q

What should regulators consider when deciding whether or not to take over an insurer?

A

⇒ How accurate are loss reserves?
⇒ If assets were liquidated quickly to meet current
creditor demands, what would proceeds be?
⇒ Has management enacted measures that are
stringent enough to stem the operating losses?
⇒ Is the insurer’s reinsurance adequate and
collectible?

114
Q

Briefly describe a receivership.

A

very severe financial difficulties - place in receivership
type of bankruptcy where a receiver is appointed who
formulates plan to distribute assets
complex activities bw receivers, courts, GFs
2 outcomes
rehab
liquidiation

115
Q

What is rehab?

A

impaired insurer continues to exist after receivership
compare A to L, if feasible try to find an investor to invest capital for equity
rehab usually retired executive or lawyer - needs to stabilize cash flows and protect assets from creditor claims

prelude to liquidation, almost always

116
Q

Considerations in rehab

A

⇒ How will loss reserves develop
⇒ Can expenses be trimmed, and how fast
⇒ How far are rates from being actuarially adequate to
meet costs
⇒ Can rates be raised without destroying the
company’s ability to market to its desired market
segment

117
Q

What is liquidation?

A

bankrupt org doesnt have enough assets to pay all creditors
usually receivership => liquidation is a few months
2 options
(1) transfer all business to another insurer
(2) sell all assets and terminate all business

118
Q

Briefly describe 2 choices a policyholder can make in the event of a liquidation.

A

⇒ Continue coverage, subject to specified maximum
amounts, and be credited with a specified
percentage of the account value with a new carrier
⇒ Discontinue coverage and receive a specified
smaller percentage of the account value in cash

119
Q

What does a special deputy liquidator do?

A

Appt by com

Has broad powers to seize and dispose of insurer’s assets,
hire and fire personnel, enter contracts and lawsuits, and
manage affairs of company
2 tasks
(1) freeze and quantify liabilities
(2) marshal assets and liquidate them

120
Q

What happens in the 1st few months of a liquidation?

A
  • Give notices of liquidation to creditors and policyholders and
    inform them of their right to file claims
  • Cancel policy coverage
  • Notify agents of their duties in the liquidation
  • Identify, sell, and collect assets
  • Recover any improperly transferred assets
121
Q

Liquidiation Bureaus

A

liquidations are so complex, led to states creating these to manage

122
Q

Priority asset classes in liquidation

A
  • Costs and expenses of administering the liquidation
  • Partial payment of debts to employees for service rendered
    within one year of the order for liquidation
  • All claims for policy losses incurred
  • Claims for unearned premiums and claims of general
    creditors
123
Q

What is a guaranty fund?

A

not-for-profit unincorporated entity established by state law
ensured to protect PH from insolvent insurer

124
Q

Limits on GF coverage

A

Lines (C- STORM), no RRGs, surplus lines, pools
UEP has stated limit
max covered claim (except WC)
claim deductibe + policy deductible
net worth deductible
insurer needs to be deemed insolvent by court and placed in liquidation

125
Q

How are GFs operated?

A

any insurer covering lines incl is a member
director of fund has broad authority to organize
assessment made based on WP (incl lines)
some states have 2% or so cap on assessments
studies show GFs have had sufficient capacity

126
Q

Why is the cost of insolvency high?

A
  • Insurers are directly assessed for the operation of guaranty
    funds
  • Competition is distorted
    ⇒ Insurers that can aggressively market or loosely
    underwrite can gain a greater share of market
127
Q

What must an insurer do regarding GFs?

A

a. Insurer can’t use the fact that the guaranty fund exists to help sell
business
b. Needs to provide new policyholders with a guaranty fund disclaimer

128
Q

What can a state do if an insurer fails to pay GF assessments?

A

may suspend or revoke license

129
Q

Do GFs pay obligations to general creditors?

A

No, only policyholders

130
Q

Why is insolvency tough for multi-state insurers regarding GFs?

A
  • Each state guaranty fund must decide how much to assess
    for the policyholders living in its state
  • State of domicile has primary authority, but each state
    involved must approve
  • Due to differing guaranty fund coverages and laws,
    establishing a single settlement plan for an insolvency
    involving many states can be complex
131
Q

Describe two actions a guaranty fund board is authorized to perform that could help prevent an insolvency.

A

Can make recommendation to state regulator about actions needed to take to prevent insolvency

Can actively participate in the correction activities for those companies which show financial difficulties

132
Q

What must a DOI do to remain accredited by the NAIC?

A

Full accreditation review must be completed every 5 years
pre-accreditation review performed the year before the full review
interim annual reviews

Exam 6U (Personal) (29 decks)

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