Porter Ch. 12: Insolvency Regulation

Question 1

Once insurer is determined to be insolvent

Answer 1

State law governs orderly liquidation / payment of claims; guaranty funds pay claims made against insolvents

Question 2

Guarantee fund payments for insolvent insurers

Answer 2

Shift liability to other insurers, policyholders, and taxpayers

Question 3

Most frequent contributors to insolvency

Answer 3

Rapid premium growth (MAJOR)
Inadequate rates / reserves
Unusual expenses
Lax control
Uncollectible reinsurance
Fraud

Question 4

Rapid premium growth

Answer 4

Reduces margin of error in operation

Indication of bargain rates / lax standards

Question 5

Action based on seriousness of insurance company condition

Answer 5

Mandatory corrective action
Administrative supervision
Receiverships, rehab, and liquid

Question 6

Mandatory Corrective Action

Answer 6

NAIC Hazardous Condition Regulation:
Perform actions to reduce liabilities
Limit new/renewal business
Reduce expenses
Increase capital/surplus
Suspend/limit dividends

Question 7

Administrative Supervision

Answer 7

Model Supervision Act:
Legal condition under which an insurer needs commissioner permission --
Selling/transferring assets
Accepting new premiums
Merging
Management changes

Question 8

Receiverships

Answer 8

Final regulatory action – financial difficulties are so severe that more supervision needed; either rehab or liquidate

Question 9

Rehabilitation

Answer 9

Impaired insurer continues to exist; assessment phase to determine feasibility of rehab, generally prelude to liquidation

Question 10

Complications of rehabilitation

Answer 10

How will reserves develop
Can expenses be trimmed
How far from adequate are rates / can they be raised without killing progress

Question 11

Liquidation

Answer 11

Creditors are prioritized and paid according to types of claims; interval from receivership to liquidation only a few months

Question 12

Receiver options in liquidation

Answer 12

Transfer all business to other insurers

Sell assets and terminate business

Question 13

Coverage for liquidated insurer’s customers

Answer 13

Continue and be credited with a new carrier OR discontinue and receive percentage of account in cash OR Guaranty fund picks up tab

Question 14

Special deputy liquidator tasks

Answer 14

Freeze and quantify liabilities

Marshal assets and convert into cash

Question 15

Priority classes of asset distribution

Answer 15

1) Costs of liquidation
2) Partial payment of debts to employees
3) Claims for incurred losses
4) Claims for UEPR and claims of general creditors

Question 16

Interstate Insolvency Remedies

Answer 16

NAIC Reforms (no state can be compelled to adopt uniform procedure)
Interstate Compacts
Federalization

Question 17

Triggers for Mandatory Corrective Action

Answer 17

Regulator’s fact finding shows policyholders at risk

Poor results on financial exams

Question 18

Triggers for Administrative Supervision

Answer 18

Mandatory Corrective Action fails

Financial conditions worse than previously thought