NAIC Solvency Framework

Question 1

three stages of financial regulation

Answer 1

• restrictions or approval requirements to mitigate or eliminate certain risks
• financial oversight and intervention powers: analysis and examination tools to detect insurers in potentially hazardous conditions
• receivership, rehabilitation, or liquidation for impaired or insolvent insurers

Question 2

components of market regulation (5)

Answer 2

[CLAMS]

• consumer information and assistance
• licensing of producers
• administration of residual markets
• monitor how insurers treat policyholders and claimants
• statistical reporting

Question 3

measures of a successful regulatory framework (4)

Answer 3

• market health, viability, and competition
• effective rehabilitation actions
• rate of insolvencies
• capacity of guaranty system

Question 4

unique features of state-based regulatory system (2)

Answer 4

• peer review and collaboration produce checks and balances

* diversity of perspectives with compromise leading to centrist solutions

Question 5

peer review mechanisms (3)

Answer 5

• regulators have power to examine all companies doing business in their state even though headquartered in another state
• commissioners can question actions of another state DOI
• regulators work cooperatively and are willing to be challenged

Question 6

seven core principals of U.S. solvency framework (7)

Answer 6

[PRRROM}

• preventative and corrective measures, including enforcement
• regulatory control of significant risk-related transactions
• reporting, disclosure, and transparency
• requirements for reserves, capital adequacy, and solvency
• ongoing off-site monitoring and analysis + on-site risk-focused examinations
• mechanisms for exiting the market and receivership

Question 7

ways risk is limited by the design of the system (4)

Answer 7

• investments requirements and limitations
• pre-approval of material transactions
• conservative valuation requirements and reinsurance credit
• RBC establishes hypothetical minimum capital

Question 8

reasons regulators may deem a company in hazardous financial condition (4)

Answer 8

• adverse findings in financial analysis or examination
• insolvencies of reinsurers or holding company system
• incompetent management
• failure to provide accurate information

Question 9

focuses of financial oversight (4)

Answer 9

[ARMA]

• appropriate asset and liability valuation
• risks accepted by an insurer
• mitigation of risks
• amount of capital held in light of residual risks

Question 10

Solvency Modernization Initiative (SMI)

Answer 10

self-evaluation to improve regulatory framework

Question 11

priorities of SMI (3)

Answer 11

• examine international developments
• comply with IAIS principles where appropriate
• apply lessons learned from 2007-2008 financial crisis, especially with respect to group supervision

Question 12

three requirements of Own Risk and Solvency Assessment (ORSA)

Answer 12

implemented by NAIC to formalize regulation of risk management; insurers above certain premium threshold must

• maintain a risk management framework
• regularly conduct an ORSA
• submit ORSA summary report to state commissioner

Question 13

Norwalk Agreement

Answer 13

signed by IASB and FASB in 2002, aims to develop a single global accounting standard

Question 14

why reinsurers are historically not regulated as much as primary insurers

Answer 14

• primary insurers and reinsurers have equal negotiating leverage
• customers (primary insurers) have extensive knowledge of the product

Question 15

impacts of Nonadmitted and Reinsurance Reform Act (NRRA) on reinsurers (3)

Answer 15

• allows states to make reinsurance collateral reforms
• prohibits a state from denying credit for reinsurance if the domiciliary state of the ceding insurer recognizes it
• defers regulation of a reinsurer’s financial solvency to reinsurer’s domiciliary state

Question 16

NAIC revisions to model laws to reduce reinsurance collateral requirements

Answer 16

• established a certification process for reinsurers, with a certified reinsurer eligible for collateral reductions
• certification criteria include financial strength, timely claims payment history, and being in a qualified jurisdiction
• rating is assigned, required collateral corresponds to rating