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
