Porter Ch. 12 Flashcards

1
Q

3 levels of regulatory action to control financial difficulties

A
  1. Mandatory corrective action
  2. Administrative supervision
  3. Receiverships, rehabilitation, and liquidation
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2
Q

List some questions raised by the fact that Guarantee funds shift liability to other insurers, policyholders, and taxpayers

A
  • Does guaranty fund protection make consumers too unconcerned about selecting financially strong insurers?
  • Do guaranty funds diminish the pressure on regulators to shut down weak insurers?
  • How much of the cost for guaranty fund protection is shifted to policyholders and taxpayers?
  • How effective is the record of state regulation?
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3
Q

List 2 benchmarks of regulatory performance

A
  1. Low insolvency rate
  2. Extent to which regulation increases expenses and restricts products
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4
Q

List some of the most frequent contributors to insurer insolvency

A
  • Rapid premium growth
  • Inadequate rates and reserves
  • Unusual expenses, such as unexpected catastrophic losses
  • Lax controls over managing general agents
  • Reinsurance uncollectible
  • Fraud
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5
Q

Which factor precedes nearly all of the major failures and why?

A

Rapid premium growth - reduces the margin for error in the operation of insurers; usually indication of bargain rates and lax u/w standards

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6
Q

2 steps of Regulatory Intervention Procedure following an insolvency

A
  1. Fact finding
  2. Implementation of regulatory action to control financial difficulties facing insurers
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7
Q

Briefly describe what happens during the “Fact Finding” stage

A

Regulators from several states examine the insure

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8
Q

List some requirements of the insurer from the Mandatory Corrective Action

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
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9
Q

Briefly describe the “Administrative Supervision” stage

A

Legal condition under which an insurer may be required to obtain the commissioner’s permission before:
* Selling or transferring assets or inforce business or using as collateral
* Withdrawing, lending, or investing funds
* Incurring debt
* Accepting new premiums
* Renewing policies that are not guaranteed for renewal; etc

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10
Q

List some issues that regulators consider when determining when to take over supervision of the 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?
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11
Q

Why is an insurer placed into receivership

A

Financial difficulties are so severe that more than supervision is needed

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12
Q

Briefly describe “receivership”

A

Type of bankruptcy an insurer enters when commissioner becomes receiver: Formulates plan to distribute insurer’s assets to settle obligations to customers

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13
Q

Two possible outcomes from receivership

A
  1. Rehabilitation
  2. Liquidation
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14
Q

Briefly describe “rehabilitation”

A

Impaired insurer continues to exist after the receivership. Use rehabilitation period to assess insurer’s financial situation by comparing its assets and liabilities

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15
Q

List some possible complications during the rehabilitation stage

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
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16
Q

Briefly describe “liquidation”

A

Bankruptcy proceeding 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

17
Q

2 options that a receiver has during a liquidation

A
  1. Transfer all of the insurer’s business including all liabilities and assets to other insurers
  2. Sells the insurer’s assets and terminates the insurer’s business
18
Q

What choice do policyholders of a liquidated insurer usually have once the insurer is liquidated

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
19
Q

2 tasks of the special deputy liquidator

A
  1. Freeze and quantify the insurer’s liabilities
  2. Marshal the assets and convert them to cash
20
Q

List some activities that need to take place during the first few months of the 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
  • Establish a procedure for receiving and adjudicating claims
  • Make personnel decisions regarding the insurer’s staff and hire outside help, if needed
21
Q

List the usual priority classes of asset distribution when they are liquidated

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
22
Q

Knowing when to take over the supervision of the affairs of insurer requires financial and administrative judgment. State two key issues to consider.

A
  • How accurate are loss reserves?
  • If assets were liquidated quickly to meet creditor demands, what would proceeds be?
  • Has management enacted tough enough measures to stem the operating losses?
  • Is company’s reinsurance adequate and collectable?