Porter - Insolvency Flashcards
What are the primary reasons for insurer insolvency?
From Porter (IU/Intenstive Unit):
* Insufficient Reserves
* Under-pricing
From Odomorik (GONGS):
* Poor Governance
* New Entrant to Market (no expertise)
* Growth to rapid (premium up front, but then losses come in)
* Size - to small to handle large losses
Other (CRAP) :
Catastrophe, Reinsurer Insolvency, Asbestos, Poor Investment results
There are lots of reasons it could happen!!!
What are the main steps in State Regulatory Intervention?
- Fact Finding
- examine insurer using resources such as financial statements, RBC, IRIS, FAST, etc.
- regulator must also use expert judgment since there may also be qualitative warning signs
- select appropriate regulatory action:
- Mandatory Corrective Action
- Administrative Control
- Receivership
What reasons may preclude the mandatory action level and what actions can the regulator take?
Reasons
* RBC < 150% (Regulatory Action Level or below)
* multiple IRIS ratios outside acceptable ranges
* judgment by regulator that that policyholders are at risk
Actions
* regulator requires insurer to submit financial improvement plan
* regulator requires reduction in liabilities (and/or increase in capital)
* regulator places restrictions on new/renewal business
What would cause a regulator to put a company in Administrative supervision and what further actions can be take?
Reasons
* mandatory corrective actions FAIL
* RBC < 100% (Authorized Control Level or below)
* further deterioration in IRIS ratios
* judgment by regulator that that policyholders are at risk (regulator has wide discretion)
Actions
* regulator must give consent for insurer
* to incur new debt
* to issue new policies
* to purchase reinsurance
* to do basically anything “important
When would a regulator put an insurance company in receivership?
Reasons
* mandatory corrective actions & administrative supervision FAIL
* regulator judges that insurer is wholly incapable of managing its operations
Actions
* a process in which a legally appointed receiver acts as custodian of a insurer’s assets & operations (has full discretion in managing insurer’s assets)
* specific actions open to the receiver are: rehabilitation and liquidation
What is the difference between rehabilitation and liquidation?
rehabilitation:
* reorganization of an insurer’s finances so that debt obligations can at least partially be met with future earnings
* may require external capital investment to stabilize operations finances
* liquidation usually follows
liquidation:
* closure and distribution of assets to creditors in priority order
What is the purpose of state guaranty funds?
- a fund administered by each state to protect policyholders in an insolvency
- the fund pays most outstanding claims and refunds most unearned premiums (subject to limitations)
How do state guaranty funds work?
- it is funded by all insurers licensed in the state
- solvent insurers pay roughly 1-2% of NWPs in assessments to the fund
- fund members elect a board of directors (approved by state insurance commissioner)
- protects only policyholders of licensed insurers (surplus lines not covered)
What are the limitations to policyholder recoveries from a state guaranty fund?
- Not all lines are covered such as: Credit, Surplus lines, Title, Ocean marine, Reinsurance, Mortgage
- Recovery for unearned premiums is capped at state limits.
- oustanding claim recovery is capped (aside from policy limits ) except WC
Also a trigger is required for state guarnty fund to make payments.
What are the recoveries an insured can expect from a guarnty fund?
- outstanding claims
- unearned premium
Remember the limitations and restrictions in place
What are the downsides to state guarnty funds?
They encourage sub-optimal decisions:
* reduces incentives for POLICYHOLDERS to shop for strong insurers (since guaranty fund will reimburse anyway)
* reduces incentive for REGULATORS to shut down weak insurer
* Policyholders don’t shop for strong insureds and the weak ones aren’t shut down by the regulators.
* costs are eventually passed onto insureds anyway
* It gets passed along in the rates!
* distorts competitive markets
* Encourages small/weak insurers to offer underpriced policies to gain market share (since guaranty funds protect them)
How does the assessment work for a guarnty fund?
assessmentA = L x NWPA / NWPtotal
*Where NWP Total is the total remaining net written premium for solvent insurers and L is liabilities eligible for recovery after insolvency.
What happens in the event of large multi-state insolvency
guaranty funds are state-level programs:
- a multi-state insurer would also have obligations in other states
- so its assets would not be fully available to an individual state fund (ie recovery)
- assessments are capped annually:
- a large multi-state insurer may require a multi-year assessment
What would happen if state guarnty funds were eliminated
policyholders, insurers, regulators
- policyholders may not be protected in an insolvency
- strong insurers will be more profitable without contributions with assessments from a guaranty fund, though weaker ones may have to behave differently
- regulators may enact more stringent solvency requirements to prevent insolvencies since no recoveries available.
What are the arguments for more stringent regulation?
- protection of policyholders is the most important goal
- strong regulations achieve this goal by minimizing insolvencies
