Flashcards in G.1.8. Porter Chapter 12 Deck (22):
List some questions raised by the fact that Guarantee funds shift liability to other insurers, policyholders, and taxpayers:
-Does guaranty fund protection make consumers too unconcerned about selecting financially strong insurers?
-Do guaranty funds diminish the pressure on regulators to shut down weak insurers?
-How much of the cost for guaranty fund protection is shifted to policyholders and taxpayers?
-How effective is the record of state regulation?
3 levels of regulatory action to control financial difficulties:
1. Mandatory corrective action
2. Administrative supervision
3. Receiverships, rehabilitation, and liquidation
List some of the most frequent contributors to insurer insolvency:
-Rapid premium growth
-Inadequate rates and reserves
-Unusual expenses, such as unexpected catastrophic losses
-Lax controls over managing general agents
List 2 benchmarks of regulatory performance:
1. Low insolvency rate
2. Extent to which regulation increases expenses and restricts products
2 steps of Regulatory Intervention Procedure following an insolvency:
1. Fact finding
2. Implementation of regulatory action to control financial difficulties facing insurers
Which factor precedes nearly all of the major failures and why?
Rapid premium growth - reduces the margin for error in the operation of insurers; usually indication of bargain rates and lax u/w standards
List some requirements of the insurer from the Mandatory Corrective Action:
-Perform certain actions to reduce its liabilities
-Limit its new or renewal business on products that are not guaranteed renewable
-Reduce its general and commission expenses by specified methods
-Increase its capital and surplus
-Suspend or limit dividend payments to stockholders / policyholders
-Limit or withdraw from specified investments
-File reports concerning the value of its assets
-Document the adequacy of its premium rates
Briefly describe what happens during the "Fact Finding" stage:
Regulators from several states examine the insurer
List some issues that regulators consider when determining when to take over supervision of the insurer:
-How accurate are loss reserves?
-If assets were liquidated quickly to meet current creditor demands, what would proceeds be?
-Has management enacted measures that are stringent enough to stem the operating losses?
-Is the insurer's reinsurance adequate and collectible?
Briefly describe the "Administrative Supervision" stage:
-Legal condition under which an insurer may be required to obtain the commissioner's permission before:
-Selling or transferring assets or inforce business or using as collateral
-Withdrawing, lending, or investing funds
-Accepting new premiums
-Renewing policies that are not guaranteed for renewal; etc.
Briefly describe "receivership":
Type of bankruptcy an insurer enters when commissioner becomes receiver: Formulates plan to distribute insurer's assets to settle obligations to customers
Why is an insurer placed into receivership:
Financial difficulties are so severe that more than supervision is needed
Briefly describe "rehabilitation":
Impaired insurer continues to exist after the receivership. Use rehabilitation period to assess insurer's financial situation by comparing its assets and liabilities
Two possible outcomes from receivership:
Briefly describe "liquidation":
Bankruptcy proceeding 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
List some possible complications during the rehabilitation stage:
-How will loss reserves develop
-Can expenses be trimmed, and how fast
-How far are rates from being actuarially adequate to meet costs
-Can rates be raised without destroying the company's ability to market to its desired market segment
What choice do policyholders of a liquidated insurer usually have once the insurer is liquidated:
-Continue coverage, subject to specified maximum amounts, and be credited with a specified percentage of the account value with a new carrier
-Discontinue coverage and receive a specified smaller percentage of the account value in cash
2 options that a receiver has during a liquidation:
1. Transfer all of the insurer's business including all liabilities and assets to other insurers
2. Sells the insurer's assets and terminates the insurer's business
List some activities that need to take place during the first few months of the liquidation:
-Give notices of liquidation to creditors and policyholders and inform them of their right to file claims
-Cancel policy coverage
-Notify agents of their duties in the liquidation
-Identify, sell, and collect assets
-Recover any improperly transferred assets
-Establish a procedure for receiving and adjudicating claims
-Make personnel decisions regarding the insurer's staff and hire outside help, if needed
Knowing when to take over the supervision of the affairs of insurer requires financial and administrative judgment. State two key issues to consider.
-How accurate are loss reserves?
-If assets were liquidated quickly to meet creditor demands, what would proceeds be?
-Has management enacted tough enough measures to stem the operating losses?
-Is company's reinsurance adequate and collectable?
List the usual priority classes of asset distribution when they are liquidated:
-Costs and expenses of administering the liquidation
-Partial payment of debts to employees for service rendered within one year of the order for liquidation
-All claims for policy losses incurred
-Claims for unearned premiums and claims of general creditors