Porter 12

Question 1

Identify 4 factors that contribute to insurer insolvencies

Answer 1

• rapid premium growth
• inadequate rates and reserves
• unusual expenses, such as unexpected catastrophic losses
• lax controls over managing general agents
• reinsurance uncollectible
• fraud

Question 2

Briefly describe the disposition of an insolvent insurance company

Answer 2

Commission to appoint special deputy liquidator to act as his agent in day-to-day

• has broad powers to seize and dispose of insurer’s assets, hire and fire personnel, enter contracts and lawsuits, and manage affairs of company
• freeze and quantify the insurer’s liabilities
• marshal the assets and convert them to cash

Years after all claims have been filed and adjudicated and all assets reduced to cash, they are distributed in specific order to different classes of creditors

Question 3

2 triggers and 8 actions for Mandatory Corrective Action (NAIC Hazardous Condition Regulation)

Answer 3

Triggers:

• fact finding by regulator indicates policyholders may be at risk
• poor results on financial examinations

Actions:

• increase level of reinsurance
• tighten underwriting acceptance
• reduce expenses
• increase its capital and surplus
• suspend or limit dividend payments
• limit or withdraw from specified investments
• file reports concerning the value of it’s assets
• document the adequacy of its premium rates

Question 4

2 triggers and 8 actions for Administrative Supervision (Model Supervision Act)

Answer 4

Triggers:

• Mandatory Corrective Action fails
• financial conditions are worse than previous level

Actions:
Insurer will need regulator’s approval for the following:
- selling or transferring assets or in force business or using as collateral
- withdrawing, lending, or investing funds
- incurring debt
- accepting new premiums
- renewing policies that are not guaranteed for renewal
- merging with another insurer
- entering into a reinsurance agreement
- paying specified policy or account values
- making any management change
- increasing officer or director compensation

Question 5

Describe receiverships

Answer 5

• financial difficulties are so severe that more than supervision is needed, final regulatory action is to place insurer in receivership
• a type of bankruptcy where the commissioner becomes the receiver, and formulates a plan to distribute the insurer’s assets to settle obligations to customers

Question 6

Which factor precedes nearly all of the major failures and why?

Answer 6

• rapid premium growth
• reduces the margin for error in the operation of insurers
• usually indication of bargain rates and lax underwriting standards

Question 7

List the 3 levels of regulatory action to control financial difficulties

Answer 7

• mandatory corrective action
• administrative supervision
• receiverships, rehabilitation, and liquidation

Question 8

Briefly describe two benchmarks of regulatory performance

Answer 8

• low insolvency rate

- extent to which regulation increases expenses and restricts products

Question 9

Describe Rehabilitation

Answer 9

• impaired insurer continues to exist after the receivership
  
  • use rehabilitation period to assess insurer’s financial situation by comparing its assets and liabilities
  • if rehab is feasible, often try to find an investor to invest capital, perhaps in return for an ownership stake
• generally a prelude to liquidation
  
  • regulator operates insurer in best interest of insureds and creditors
• rehabilitator is commonly a retired industry executive or lawyer
  
  • first challenge is to stabilize cash flow and protect assets from the claims or creditors

Question 10

Describe Liquidation

Answer 10

• bankruptcy preceding in which a bankrupt organization does not have enough assets to pay all creditors
  
  • creditors are prioritized and paid according to the types of their claims
  • usually the interval from receivership to liquidation is only a few months
  • damage to reputation once in rehab may be too much to overcome
• receiver has two options:
  
  • transfer all of the insurer’s business including all liabilities and assets to other insurers
  • sells the insurer’s assets and terminates the insurer’s business

Question 11

Identify 3 possible solutions for dealing with the complexity of interstate insolvencies to reduce redundant work and improve the consistency of the treatment of policyholders

Answer 11

• NAIC reforms
• interstate compacts
• federalization