Porter.12-Insolvency

Porter Chapter 12, Insolvency Regulation (excluding 12.12 - 12.17), covers causes of insurer insolvency, and regulatory actions open to a state DOI in an insolvency or to avoid a potential insolvency.

The CAS syllabus lists pages 12.12-12.17 as a separate syllabus entry under the topic of Government & Industry Programs. Those pages from Porter cover guaranty funds, which are a way of partially protecting policyholders if an insolvency does indeed occur. This is discussed more fully in Porter.Reg-2.

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Study Tips

Alice doesn't have much advice here. The material isn't hard. Just memorize it. Your initial study may take 60-90 minutes, then build the quizzes into your review schedule (same as any other reading.) Don't forget to use the analytics that are available to you on the Combat Training page: score & lapse. Some people also like to use the color-coding in the first column of the quiz pages. You can then filter by these colors using the Custom Battles page. Link in sidebar.

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

Questions held out from most Fall 2019 exam: #4. (Skip these now to have a fresh exam to practice on later. For links to these questions, see Exam Summaries.)

reference	part (a)	part (b)	part (c)	part (d)
E (2019.Spring #3)	causes of insolvency: - describe	regulatory intervention: - for at-risk insurer	Vaughan.Crisis
E (2019.Spring #6)	guaranty funds: - reasons/funding/effects	guaranty funds: - limitations	guaranty funds: - elimination
E (2018.Fall #2)	Porter.5-Opns-State	Porter.5-Opns-State	receivership: - rehab vs liquidation
E (2018.Spring #7)	guaranty funds: - strong insurers	guaranty funds: - multi-state insurers 2	guaranty funds: - elimination 1
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 (2015.Fall #9)	Porter.Reg-2	Porter.Reg-2	Porter.Reg-2	guaranty funds: - elimination 1
E (2012.Fall #4)	regulatory intervention: - reasons & actions	receivership: - definition	receivership: - possible outcome

¹ The identical question appeared on 2 exams. (effect on various stakeholders of eliminating guaranty funds)

² The answer to this question about multi-state insurers is essentially the same as a similar question about national multi-LINE insurers from Porter.Reg-2.

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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

Preliminary Note #1: This section overlaps with RBC Action Levels but is not completely consistent. See this forum discussion for more details.

Preliminary Note #2: This section discusses levels of regulatory action, but the reading NAIC.Solvency discusses stages of the regulatory process. It sounds very similar and the reason I mention it is that it came up on the following exam problem:

E (2019.Spring #3)

Anyway, let's proceed. 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 is 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 finances so that debt obligations can at least partially be met with future earnings
• (may require external capital investment to stabilize operations finances)
• 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 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
• solvent 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 on guaranty funds. Just something a little different. 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 they might throw at you.

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