Porter Ch. 12

Question 1

3 levels of regulatory action to control financial difficulties

Answer 1

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

Question 2

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

Answer 2

• 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?

Question 3

List 2 benchmarks of regulatory performance

Answer 3

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

Question 4

List some of the most frequent contributors to insurer insolvency

Answer 4

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

Question 5

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

Answer 5

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

Question 6

2 steps of Regulatory Intervention Procedure following an insolvency

Answer 6

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

Question 7

Briefly describe what happens during the “Fact Finding” stage

Answer 7

Regulators from several states examine the insure

Question 8

List some requirements of the insurer from the Mandatory Corrective Action

Answer 8

• 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

Question 9

Briefly describe the “Administrative Supervision” stage

Answer 9

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

Question 10

List some issues that regulators consider when determining when to take over supervision of the insurer

Answer 10

• 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?

Question 11

Why is an insurer placed into receivership

Answer 11

Financial difficulties are so severe that more than supervision is needed

Question 12

Briefly describe “receivership”

Answer 12

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

Question 13

Two possible outcomes from receivership

Answer 13

1. Rehabilitation
2. Liquidation

Question 14

Briefly describe “rehabilitation”

Answer 14

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

Question 15

List some possible complications during the rehabilitation stage

Answer 15

• 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

Question 16

Briefly describe “liquidation”

Answer 16

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

Question 17

2 options that a receiver has during a liquidation

Answer 17

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

Question 18

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

Answer 18

• 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

Question 19

2 tasks of the special deputy liquidator

Answer 19

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

Question 20

List some activities that need to take place during the first few months of the liquidation

Answer 20

• 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

Question 21

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

Answer 21

• 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

Question 22

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

Answer 22

• 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?