Solvency Regulation

Question 1

common reasons for insolvencies (5)

Answer 1

• rapid premium growth
• inadequate rates/reserves
• unusual expenses, e.g. cat loss
• uncollectible reinsurance
• fraud

Question 2

two ways a weak insurer can be saved without poor condition being made known widely

Answer 2

• mergers/acquisitions

* capital infusions

Question 3

solvency regulation goals to balance

Answer 3

low insolvency rate desired, but consider expense and restriction of product offerings that accompany regulation

Question 4

steps in regulatory intervention

Answer 4

1) fact finding
2) implementation of regulatory action to control financial difficulties:
a) mandatory corrective action
b) administrative supervision
c) receivership, rehabilitation, liquidation

Question 5

“fact finding” stage

Answer 5

review of IRIS and FAST, financial reports, opinions about reserve adequacy, etc. to determine whether public or policyholders will be harmed by insurer’s financial condition

Question 6

actions regulators may require for insurers under mandatory corrective action (7)

Answer 6

authorizes regulators to require specific actions:

• reduce liabilities
• limit new business
• reduce general and commission expenses
• increase capital and surplus
• suspend or limit dividend payments
• limit or withdraw from certain investments
• document adequacy of rates

Question 7

actions that require regulator permission for an insurer under administrative supervision (7)

Answer 7

[AWRISE]
regulators can seek court authority to take formal control, and insurers need permission before taking certain actions:
* accepting new premiums
* withdrawing, lending, or investing funds
* renewing policies
* incurring debt 
* selling or transferring assets
* entering reinsurance agreements

Question 8

receivership

Answer 8

commissioner becomes the receiver and makes a plan to distribute the insurer’s assets and meet obligations; two possible outcomes: rehabilitation or liquidation

Question 9

rehabilitation

Answer 9

insurer continues to exist while receiver assesses whether assets are sufficient to meet claims and other liabilities if reasonably managed; investor may be sought

Question 10

liquidation

Answer 10

insurer ceases to exist; creditors are prioritized and paid according to type of claim

Question 11

what happens to cancelled policies of liquidated insurer

Answer 11

• business may be transferred to other insurers; policyholders can opt out
• state guaranty fund provides limited substitute coverage

Question 12

primary tasks of liquidator (2)

Answer 12

• freeze and quantify liabilities

* collect assets and convert to cash

Question 13

prioritization of distribution of assets of liquidated insurer

Answer 13

1) administrative costs of liquidation
2) partial payment of debts for services
3) claims for policy losses
4) claims for unearned premium and general creditors

Question 14

purpose of guaranty funds

Answer 14

provides a system to pay claims of insolvent insurers, funded by pre-solvency or post-solvency assessments

Question 15

benefits of pre-insolvency v. post-insolvency approach

Answer 15

• pre-insolvency approach allows cat fund to be built

* post-insolvency approach is more accurate, has lower initial costs

Question 16

compliance responsibilities for insurers with regard to guaranty funds (2)

Answer 16

• can’t use the existence of the guaranty fund to help sell business
• must provide policyholders with a disclaimer about the guaranty fund

Question 17

guaranty fund coverage limitations (6)

Answer 17

• lines covered: title, credit, mortgage, ocean marine, reinsurance, and surplus lines are excluded
• limited refunds of unearned premium
• maximum covered claim, except work comp
• claim deductibles over policy deductible
• large net worth deductible
• coverage is available only after the insurer is put into liquidation