NAIC Solvency Framework Flashcards
three stages of financial regulation
- 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
components of market regulation (5)
[CLAMS]
- consumer information and assistance
- licensing of producers
- administration of residual markets
- monitor how insurers treat policyholders and claimants
- statistical reporting
measures of a successful regulatory framework (4)
- market health, viability, and competition
- effective rehabilitation actions
- rate of insolvencies
- capacity of guaranty system
unique features of state-based regulatory system (2)
- peer review and collaboration produce checks and balances
* diversity of perspectives with compromise leading to centrist solutions
peer review mechanisms (3)
- 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
seven core principals of U.S. solvency framework (7)
[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
ways risk is limited by the design of the system (4)
- investments requirements and limitations
- pre-approval of material transactions
- conservative valuation requirements and reinsurance credit
- RBC establishes hypothetical minimum capital
reasons regulators may deem a company in hazardous financial condition (4)
- adverse findings in financial analysis or examination
- insolvencies of reinsurers or holding company system
- incompetent management
- failure to provide accurate information
focuses of financial oversight (4)
[ARMA]
- appropriate asset and liability valuation
- risks accepted by an insurer
- mitigation of risks
- amount of capital held in light of residual risks
Solvency Modernization Initiative (SMI)
self-evaluation to improve regulatory framework
priorities of SMI (3)
- examine international developments
- comply with IAIS principles where appropriate
- apply lessons learned from 2007-2008 financial crisis, especially with respect to group supervision
three requirements of Own Risk and Solvency Assessment (ORSA)
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
Norwalk Agreement
signed by IASB and FASB in 2002, aims to develop a single global accounting standard
why reinsurers are historically not regulated as much as primary insurers
- primary insurers and reinsurers have equal negotiating leverage
- customers (primary insurers) have extensive knowledge of the product
impacts of Nonadmitted and Reinsurance Reform Act (NRRA) on reinsurers (3)
- 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
