Section 2.3 Flashcards
Describe the limitations that guaranty funds may have on reimbursements to policyholders
LOB exclusions: [Hint: C-STORM]
* Credit, Surplus lines, Title, Ocean marine, Reinsurance, Mortgage
claims payouts and UEP refund: have stated limits (except claims payouts for WC - WC has no limit)
deductibles:
* claim deductible
* policy deductible
* large net worth deductible (a percentage of an insured’s net worth)
trigger is required:
court must verify insolvency and have placed insurer in receivership
From problem
Unearned premium may not be fully recouped
Claim limit
Claim deductible
Large net worth deductible
Means test/restrictions
Surplus lines don’t qualify
Risk retention groups don’t qualify
May be delay in payments
Trigger of coverage, coverage only begins after a court declares the insurer insolvent
Fund may be exhausted because there is a finite limit (2% of written premium) that can be assessed per a year
Porter Reg
How to calculate an insurer assessment (in event of other state insurer insolvency)?
The other item concerns insurer assessments. If
L = insurer liabilities eligible for recovery after insolvency
NWPA = NWP of insurer A (one of the remaining solvent insurers in state)
NWPtotal = total NWP of remaining solvent insurers in state
then:
Formula: assessmentA = L x NWPA / NWPtotal
Porter Reg
Fully describe the process used by guaranty funds to assess insurers
Post-Solvency Assessment:
* Regulator determines the amount of funds needed
* Regulator charges assessment to remaining insurers based on market share
* Assessments are capped at a % of WP and can recur for multiple years
Porter Reg
What would be advantages/disadvantages of having the guaranty fund pre-funded (perhaps a yearly payment from all insurers of 1-2% of premium)?
Advantages:
* The funds would be ready when an insolvency happens if they are prefunded (quicker relief for policyholders)
* The fund can earn investment income on the assessments collected over time, lowering
the amount required from insurers
* The pre-funding method would guarantee the fund is funded at all times
* Increase speed of claim payment when insolvency occurs
* Less admin cost after insolvency
* Increased protection for policyholders since a reserve can be built up
* Less disruptive than large assessment after insolvency
* Insurers can anticipate cost upfront and plan accordingly
* State can invest the funds and earn investment income
* Future insolvent insurers also contribute to the fund, which may be more fair
Disadvantages:
* Prefunding can incur expenses for insurers for a fund that might not even be used, which would increase costs that trickle down to policyholders through rates
* Determining the actual percent of written premium would be difficult (fund may end upover/under-funded)
* The pre-funding amount is factored into pricing and hence more expensive for policyholders
* Insurers cannot invest the funds collected by the guarantee fund
* The small percentage of WP may not be enough when an insolvency occurs
* Difficult to estimate the appropriate percentage ahead of the time
* With the backdrop, consumers may be indifferent in choosing insurers – this may hurt the insurers with strong financial rating and underwriting
* If the assessment is based on total WP, it may be unfair since only certain LOBs are covered by Guaranty Funds
* WP is not always correlated with risk & exposure; Companies with different risk levels
may be assessed the same %
* May not have insolvency for a long time so pre-funding may be inefficient
* May be a burden for insurers at the verge of insolvency; The additional financial burden could lead to more insolvencies
* The additional costs in pre-funding states may cause insurers to focus more on growing in other states and at the extreme level, stop writing business in pre-funding states
* Large (stable) insurers may be subsidizing the smaller insurers which may be more likely to go insolvent
Porter Reg
Describe how a guaranty fund provides services to policyholders
- Handles claims of insolvent insurer OR Pays claims and returns unearned premium of insolvent insurer
- Provides temporary coverage in case of insolvency
Porter Reg
Explain why insurers are prohibited from using information about guaranty funds in marketing materials
- Guaranty fund has limited coverage OR policyholder may not be fully indemnified
- Moral hazard OR distorting competition OR existence of guaranty fund does not prove
financial strength OR insurer grows irresponsibly OR policyholders would be less likely to
seek a financially strong insurer
Porter Reg
Identify characteristics of the business of insurance
- SPECIFIC to insurance industry
- SPREADS risk (or transfers risk)
- CONTRACT between insurer & insured
Porter Fed
Give some examples of federal regulation
1933: Securities Act (disclosure & reporting requirements for publicly traded companies, see also the wikipedia article Securities Act of 1933)
1968: National Flood Insurance Act (discussed further in the wiki article Horn.Flood in the subsection Intro to NFIP)
1981: Risk Retention Act (discussed further in the wiki article GAO.Report in the subsection Intro to Risk Retention Groups)
Porter Fed
Identify Complicating Factors in Rate Regulation for Regulators
complicating factors in rate regulation:
- costs are not known at time of purchase
(must be estimated)
- must balance solvency and affordability considerations
- complexity of rating plans
(difficult for regulator to form a systematic approach across companies)
Porter Fed
What act established the Federal Insurance Office?
Dodd-Frank Wall Street Reform and Consumer Protection Act
Porter Fed
What is the National Association of Insurance Commissioners?
The NAIC is the U.S. standard-setting and regulatory support organization…
- created & governed by the chief insurance regulators
- from the 50 states, the District of Columbia and five U.S. territories.
Porter State
What does the NAIC do?
fundamental goals:
- promote public interest (including fair & equitable treatment of consumers)
- promote insurer solvency
- promote state insurance regulation
types of regulatory assistance provided by the NAIC:
- Develop uniform financial reporting standards
- Assist states with pricing/coverage
- Maintain databases to track solvency
Porter State
Identify the mission of the NAIC Accreditation program
maintain standards for solvency regulation
NAIC-Accreditation is voluntary but all states have gone through the accreditation process anyway.
One of the big advantages to being accredited, both to regulators and insurers, is that regulations are more likely to be uniform across states.
Remember that the McCarran-Ferguson Act of 1945 essentially preserved state regulation, with certain exceptions, but without NAIC oversight states could have wildly different regulatory systems. Note that NAIC oversight is different from federal regulation. Recall that the NAIC is a support organization consisting of state regulators (and D.C. and U.S. territories) whereas federal regulation would involve the passage of laws by Congress.
Porter State
Describe the NAIC Accreditation program for states
Interview:
- personnel from state insurance department
Review:
- state laws
- prior examination reports
- files on selected state insurers
- operations of state insurance department
Understand:
- communications within state insurance department
Discuss:
- findings
Report:
- findings
Porter State
What are some typical features of a state insurance regulatory system?
A state system typically has requirements for insurers regarding:
- licensing
- reporting & filing
A state system typically has authority to:
- conduct periodic exams
- impose sanctions
Porter State
Identify goals of insurer regulation
- promote public interest (includes fair & equitable treatment of consumers)
- promote insurer solvency
- promote competitive markets
- promote availability of coverage
Porter State
Describe initiatives to improve state-based insurance regulation
==> improve RBC calculation
* doesn’t currently include operational risk, catastrophe risk, interest rate risk
* RBC now includes these 3 risks ← shout-out to downthesun!
==> review IFRS accounting standards:
* using IFRS would improve uniformity in global insurance market
==> encourage ORSA: ( Own Risk Solvency Assessment)
* insurers self-assess and provide insight to regulators
Porter State
Argue for and against the statement:
“The financial crisis of 2007-2008 demonstrated that insurance should be regulated at the federal level”
For
* Need one national voice in dealing with global insurance topics
* Since insurance is a critical element of society, federal regulation would help avoid a
massive insurer failure
* A single authority would allow ease of monitoring so that business transactions in all states
Against
* Insurance companies were the least hit by the crisis, which showed that current rules and
regulations at the state level are effective in keeping insurance companies afloat and
ongoing
* Duplication, peer review, and diversity of opinions among state regulators more likely to
catch failing companies
* The low amount of problems in state-regulated insurers relative to federally-regulated
banks shows that state regulation is an effective process
Porter State
Describe options available to non-domiciliary regulators to assess insurer’s financial strength
- Other regulators can order examinations on their own (single-state effort, multi-state
effort that doesn’t involve the NAIC. Outside regulator could also pressure domestic
regulator to take action. - -Can review public financial statements to calculate IRIS ratios and RBC ratios, as well as
review income statement and balance sheet to help determine if the insurer is troubled.
-Check rating from financial rating agency. Has it changed during the last several years? - -The outside regulator may conduct its own review; the insurer is subject to regulation by
any state in which it operates, regardless of whether the insurer is a foreign, domestic, or
alien operator.
-If the company is a nationally significant insurer, then the outside regulator could rely on
findings from the review by the NAIC’s Financial Analysis Division. - -Pressure the domiciliary regulator to examine the company
-Examine the company themselves - -Non-domiciliary states are required to license insurers in their state and may assess an
insurer’s financial position when it applies for a license - -They could do their own financial exam to evaluate solvency.
-They could use NAIC’s monitoring and assessment tools and possibly ask the NAIC for help
(e.g. refer the insurer to FAWG if it has not already been caught through the FAD’s periodic
analysis as being of concern.)
Porter State
Define ‘model law’ as used by the NAIC
- a law developed by the NAIC which is suggested for use in all states
- states can adopt, decline, or modify the law
Porter State
Why might a state regulator SUPPORT adoption of a NAIC model law?
efficiency:
- research & drafting of law has been done (no need for states to redo this work)
uniformity:
- if adopted by all states, it’s easier for each state to regulate multi-state insurers
Porter State
Describe ways insurers BENEFIT from model laws
- NAIC model laws provide uniformity across states
- less expensive for multi-state insurers to enter market and comply with regulations
Porter State
Describe reasons for a state to MODIFY a particular model law
- to meet unique needs of state
- to coordinate with existing laws of state
Porter State
Why might a state regulator OPPOSE adoption of a NAIC model law?
redundancy:
- similar state laws may already exist
irrelevancy:
- model may not address unique needs of state
Porter State
What does the state DOI do?
Group 1: licensing & regulation
- licensing of insurers (for insurers doing business in their state)
- licensing of producers (sellers may have to pass exams, pay licensing fees, perform continuing education)
- regulation of rates & coverages (see below for 4 types of rate filings)
- regulation of claims adjusters (market conduct exams may include claims adjusting & settlement practices)
Group 2: insurer solvency
- financial exams (includes financial statements, IRIS,…)
- monitor sale of insurance securities (stocks, bonds, real estate, loans)
- determine need for receivership (either rehabilitation or liquidation of an impaired insurer)
Group 3: other services
- fraud prevention (NAIC has an online fraud reporting system)
- consumer services (education, complaint resolution)
Porter Opns State
Briefly describe the 4 types of rate regulation
prior approval: rates must be approved before use (use varies by line of business)
file & use: rates must be filed before use
use & file: rates may be used immediately but must be filed within a specified time frame (like 30 days)
no-file: rates may be used without filing (sometimes called open competition)
Porter Opns State
How would this item affect minimum capital requirements: line of business?
- long tailed lines require more capital (higher settlements, more volatility)
- lines with cat exposure require more capital (more volaility)
- insurers with only 1 line require more capital (no diversification benefit)
Porter Opns State
How would this item affect minimum capital requirements: ownership structure?
- stock companies require less capital (can raise money by selling stock)
- subsidiary companies require less capital (can receive capital injections from parent)
- alien insurers may require MORE capital because regulators have less access to insurer’s operations
- RRGs and captives may require less capital (pooling arrangments spread risk, and better risk management)
Porter Opns State
Identify reasons for state disapproval of a form/rate filing
rejection based on ratemaking principles:
- rate is inadequate
- rate is excessive
- rate is unfairly discriminatory
rejection based on filing rules:
- missed deadline
- insufficient documentation
- exceeded state rate cap (even if rate isn’t excessive)
rejection for political reasons:
- government promised no rate increases
Porter Opns State
Identify advantages for electing a state insurance commissioner
- will serve a full term (an appointed commissioner is subject to dismissal by whoever appointed them)
- will be more responsive to the electorate
May not be on test
Porter Opns State
Identify advantages for appointing a state insurance commissioner
an appointed commissioner
- doesn’t need to campaign (or spend time raising campaign funds)
- is likely to be more knowledgeable about insurance (versus someone who is good populist campaigning)
Porter Opns State
Briefly describe the duties of a state insurance commissioner
duties of the commissioner obviously overlap with functions of the state DOI, but a few additional items listed in Porter include:
- managing activities of the DOI
- initiating action when insurance law violations occur
- issuing annual reports
- maintaining records of DOI activities
Overall duty is to enforce insurance laws of state
Porter Opns State
Identify and briefly describe administrative activities of a state DOI
communications:
- written materials
- surveys of insurers
- advisory groups
- press conferences
funding:
- premium taxes
- fees & assessments
- appropriations from state treasuries
- fines & penalties
budgeting:
- varies greatly by size of state
hiring:
- contract hiring (technical expertise)
- appointment hiring (senior staff)
- career hiring (civil service)
Porter Opns State
What are some of the different ownership structures of insurance companies?
stock company:
* owned by stockholders, goal is to make a profit for stockholders (policyholders do not share in profits)
* this is the most common ownership structure in the U.S.
subsidiary:
* more than 50% of stock owned by a parent company or holding company
* parent is not necessarily another insurer (could be a bank)
mutual company:
* owned by policyholders, dividends are paid to policyholders at the discretion of management/BoD
* often fill an unmet need, can be small & local or large & international
* this is the most common ownership structure globally
reciprocal company:
* owned by policyholders, managed by attorney-in-fact, each member covers the risk of other members
* similar to mutual companies except:
- reciprocals transfer risk to other subscribers
- mutuals transfer risk to the organization
risk-retention group, captive:
* see: What is a risk retention group?
foreign insurer:
* an insurer domiciled in another state (not another country)
alien insurer:
* an insurer domiciled in another country
Porter Opns State
Analysis of Issues and Recommended Practices
(3.1) The actuary should communicate clearly with the intended user in a timely manner. (I’m glad this ASOP mentioned this because normally I write my actuarial reports unclearly. Joke.)
(3.2) In terms of what the actuary should communicate, here’s a little memory trick: DAM, which stands for Data, Assumptions, Methods.
(3.3) If the actuary is pressed for time, they can skip the less important details that would otherwise need to be included in an actuarial report. (Use your judgment.)
(3.4) This section talks about disclosures that are required in an actuarial report. I’m not sure why they include this section since disclosures are discussed in detail in section 4 of this ASOP.
ASOP 41
list the items that must be disclosed in any actuarial report
Conflicts of interest
* actuary’s spouse is the CFO of the company
Risks
* earthquakes are unpredictable so reserves have a wide range
Intended user
Scope evaluate
* company’s year-end reserves
Info that actuary used but doesn’t assume responsibility for
* loss estimates from a catastrophe modeler
Subsequent events
* data error in year-end data discovered in January
Limitations on applicability of findings
* applies only to lime-green, 3-door Bentleys 😄
Qualifications of actuary
* just got his FCAS - woo-hoo!!
ASOP 41
What should actuarial report include if there are assumptions/methods prescribed by law?
==> name of the law
==> assumptions/methods prescribed by the law
==> that the report-writer actually followed the law.
ASOP 41
What information needs to be disclosed when the actuary relies on someone else’s work?
If the work is not material, no disclosure.
If the work is material, then there are 3 choices:
* If the actuary agrees with the work, no disclosure. ← The examiner’s report did not accept this answer. See this forum discussion.
* If the actuary doesn’t agree with the work, disclose.
* If the actuary cannot judge the work, disclose.
Now, if disclosure is required, what do you have to include? The answer is the
==> extent of reliance
==> assumptions/methods relied upon
==> name of the other party.
Unrelated Note, if you materially deviate from ASOP guidance, you should disclose.
ASOP 41
