Porter.12-Insolvency

Porter Chapter 12, Insolvency Regulation, covers causes of insurer insolvency, and regulatory actions open to a state DOI in an insolvency or to avoid a potential insolvency. Guaranty funds are one way of partially protecting policyholders from the effects of an insolvency.

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BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• guaranty funds - what they are, how they work, other issues
• causes of insolvency, regulatory intervention

reference	part (a)	part (b)	part (c)	part (d)
E (2018.Spring #7)	guaranty funds: - strong insurers	guaranty funds: - multi-state insurers	guaranty funds: - elimination
E (2017.Fall #5)	guaranty funds: - types of recoveries	guaranty funds: - limitations	guaranty funds: - good or bad?
E (2016.Fall #3)	causes of insolvency: - describe	bankruptcy processes: - insurers vs non-insurers	strong solvency regs: - argue for/against	regulatory intervention: - for at-risk insurer
E (2012.Fall #4)	regulatory intervention: - reasons & actions	receivership: - definition	receivership: - possible outcome

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In Plain English!

Intro

The main topic in this chapter is reasons for insurer insolvency:

Question: describe reasons for insurer insolvency

• There are many different reasons an insurer may go insolvent. A couple of general reasons are deficient reserves or under-pricing. More specific reasons include GoNGS, which are covered in causes of insolvency in Odomirok.21-Tools.

The most important job of a state regulator is to minimize the likelihood of an insolvency. The regulator must be aware of the financial strength of insurers in their state, and, if necessary, intervene.

Question: identify the 2 main steps of state DOI regulatory intervention

Step 1: fact-finding:

   - examine insurer using resources such as financial statements, RBC, IRIS,..

   - regulator must also use expert judgment since there may also be qualitative warning signs

Step 2: select appropriate regulatory action:

   - see below for 3 levels of actions

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Levels of Regulatory Action

If the regulator deems it necessary, they make take certain regulatory actions against a troubled insurer: (The hint works out perfectly here - if insurers mar their financial health, they are subject to regulatory action.)

Question: identify the 3 levels of regulatory action the state DOI may impose on financially weak insurers [Hint: MAR]

Mandatory action level

Administrative supervision

Receivership (a type of bankruptcy)

Of course we need a few more details on these regulatory actions.

Question: what reasons would cause an insurer to be subject to the above regulatory actions

Mandatory action level      (any or all of the following)

• RBC < 150% (Regulatory Action Level or below)
• multiple IRIS ratios outside acceptable ranges
• judgment by regulator that that policyholders are at risk

Administrative supervision      (any or all of the following)

• mandatory corrective actions FAIL
• RBC < 100% (Authorized Control Level or below)
• further deterioration in IRIS ratios
• judgment by regulator that that policyholders are at risk (regulator has wide discretion)

Receivership (a type of bankruptcy)

• mandatory corrective actions & administrative supervision FAIL
• regulator judges that insurer is wholly incapable of managing its operations

Question: what actions are the regulator authorized to take for each action level

Mandatory action level      (any or all of the following)

• regulator requires insurer to submit financial improvement plan
• regulator requires reduction in liabilities (and/or increase in capital)
• regulator places restrictions on new/renewal business

Administrative supervision      (any or all of the following)

• regulator must give consent for insurer to incur new debt
• regulator must give consent for insurer to issue new policies
• regulator must give consent for insurer to purchase reinsurance
• regulator must give consent for insurer to do basically anything "important"

Receivership (a type of bankruptcy)

• a process in which a legally appointed receiver acts as custodian of a insurer's assets & operations
• (has full discretion in managing insurer's assets)
• specific actions open to the receiver are: rehabilitation and liquidation

Question: describe the receivership actions of rehabilitation & liquidation

rehabilitation:

• reorganization of an insurer's operations so that obligations can at least partially be met with future earnings
• (may require external capital investment to stabilize operations)
• liquidation usually follows

liquidation:

• closure and distribution of assets to creditors in priority order

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Guaranty Funds

If an insurer goes insolvent, one of the mechanisms in place to protect policyholders is a state guaranty fund.

Question: what is a state guaranty fund

• a fund is administered by each state to protect policyholders in an insolvency
• the fund pays most outstanding claims and refunds most unearned premiums (subject to limitations)

Question: how does a state guaranty fund work

• it is funded by all insurers licensed in the state
• insurers pay roughly 1-2% of NWPs in assessments to the fund
• fund members elect a board of directors (approved by state insurance commissioner)
• protects only policyholders of licensed insurers (surplus lines not covered)

Ian-the-Intern found a nice little summary on the web of how guaranty funds work. The details are specific to the Texas DOI, but the "History" subsection at the top of the page is applicable to any state. Thanks Ian!

There are several old exam questions on guaranty funds included in the next quiz. If you can do those, you should be set for anything the might throw at you.

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