Section G Regulation of Insurance: NAIC Solvency

Question 1

List the US Insurance Regulatory Mission

Answer 1

Protect the interests of the policyholder and those who rely on the insurance coverage provided to the policyholder first and foremost, while also facilitating the financial stability and reliability of insurance institutions for an effective and efficient marketplace for insurance products.

Question 2

What approach did regulators determine is the best way to achieve this Regulatory Mission

Answer 2

Combining Financial Regulation and Market Regulation

Question 3

Three stages of Financial Regulation

Answer 3

1️⃣ Mitigate/eliminate risks via restrictions on insurer’s activities

2️⃣ Use financial tools and oversight to work with insurers to implement corrective actions

3️⃣ Provide a backstop of financial protection in the event of a receivership

Question 4

List and briefly describe three types of receivership

Answer 4

🧰 Conservation = safeguard the insurer’s assets while the regulator determines the best course of action

🛠 Rehabilitation = a tool to fix the problems, protect assets, run off the liabilities or prepare for liquidation

🕵🏼‍♀️ Liquidation = identify the creditors and distribute the assets

Question 5

Briefly define Market Regulation

Answer 5

Analysis/ oversight of insurer’s behavior in the market

Question 6

What do regulators look at during Market Regulation

Answer 6

🤝 Treatment if policyholders & claimants in product development and pricing

👥 Competition

📊 Statistical reporting

🛒 Administration of residual markets

🧾 Licensing of insurance producers

📇 Consumer assistance and information services

Question 7

List some factors that influence the optimum level of regulation

Answer 7

💸 Costs and benefits of regulation

🤝 Fair and equitable treatment of insurance consumers

💰💪🏼 Financial stability and reliability of insurance institutions

Question 8

List some factors that we can consider when assessing the level of regulatory success

Answer 8

▫️ Frequency and extent that the regulation helped by identifying and correcting the insurer’s problems before they caused harm to policyholders and claimants

▫️ Frequency of insolvencies and payments to policyholders in those insolvencies

▫️ Effective and efficient rehabilitation actions

▫️ Market health

▫️ Levels if competition

▫️ Perceived and actual cost-benefit of regulation

Question 9

List three points to support the argument that the US regulatory system has been “successful”:

Answer 9

💪🏼📋There is a strong track record of protecting consumers and overseeing solvency

💪🏼🇺🇸There is strong depth and breadth of the US insurance industry

🔘🗂Capacity if the insurance guaranty system

Question 10

List the components of “Requisite Authority”:

Answer 10

🗄Legal basis

📰Independence and accountability

🦸🏻‍♂️Adequate powers

💵Financial resources

👨‍👩‍👧‍👦Human resources

👩🏼‍⚖️Legal protection

🤫Confidentiality

Question 11

How can regulators effectively regulate in a market as big as the US insurance market

Answer 11

Regulators need to adopt a risk focused approach, where they focus on the greatest risk that insurers are exposed to.

Question 12

List two unique features of US insurance regulation

Answer 12

1️⃣ Extensive system of peer review, communication and collaborative effort: commissioners can question the actions of another DOI and pressure that DOI to act

2️⃣ Diversity of perspective results in centrist solutions: Overregulation harms consumers, whereas under regulation harms consumers and taxpayers

Question 13

Seven core principles of the US Insurance Financial Solvency Framework

Answer 13

1️⃣ Regulatory reporting, disclosure and transparency

2️⃣ Off-site monitoring and analysis

3️⃣ On-site risk focused examinations

4️⃣ Reserves, capital adequacy and solvency

5️⃣ Regulatory control of significant, broad-based risk-related transactions/activities

6️⃣ Preventive and corrective measures including enforcement

7️⃣ Exiting the market and receivership

Question 14

Briefly describe Principle 1 (regulatory reporting, disclosure and transparency)

Answer 14

Insurers regularly provide standardized financial reports to regulators to help assess risk and financial condition

Question 15

List some qualitative disclosures contained in the reports provided to regulators

Answer 15

❓Interrogatories

📝 Notes to the financial statements

🗣 Management’s discussion and analysis

🔵 SAO

🧾 Annual audit option (from the CPA)

Question 16

Why are insurers subject to market discipline

Answer 16

Insurance reporting is very transparent: consumers can access the annual and quarterly statements. The market discipline will arise from analysis by the industry, financial markets and public.

Question 17

Main purpose of off-site solvency monitoring

Answer 17

Assess the financial condition of the insurer on an on-going basis and also to identify and assess current and prospective risks

Question 18

What type of information do regulators use in the off site monitoring (in addition to the regulatory financial reports and financial tools)

Answer 18

📁CPA audit reports
📃Results of the most recent on-site regulatory financial exam
🗂SEC filings
📂Corporate reports
🧾Financial statements of controlling companies
📊Market conduct report
🗃Rate and form filings
🤦🏼‍♀️Consumer complaints
📁Independent rating agency reports
🗣Correspondence from agents and insurers

Question 19

List some items that are elevated during the on-site exams

Answer 19

📜Corporate governance
👨🏻‍💻Management oversight
💪🏼Financial strength
⚖️Risk identification and mitigation

Question 20

In what cases can the regulators perform exams more often than every five years

Answer 20

The regulators may perform more frequent exams of insurers who are subject to a higher level of financial risk. These more frequent exams may focus only on a specific risk.

Question 21

Two purposes of the on-site exams

Answer 21

1️⃣ Evaluate the solvency of the insurers, based on the view of the strengths and weaknesses

2️⃣ Develop a prospective view of the insurer’s risks and risk management practices

Question 22

What type of information is included in the public exam report

Answer 22

👨🏻‍💻 Assessment of financial condition

📃 Details about any of the material adverse findings from the exam

📑 May include required corrective actions, improvements, recommendations

Question 23

Two reasons that the insurer needs to hold surplus in addition to reserves

Answer 23

1️⃣ The resources can cover the policyholder obligations in most future economic scenarios

2️⃣ There are sufficient resources for the regulator to be able to suggest or take corrective action in the case that an adverse trend is detected

Question 24

List some transactions or activities that affect the policyholders’ interests that require regulatory approval:

Answer 24

📃 Licensing requirements

👨🏻‍💼 Change in control

💳 Dividends

🤝 Transactions with affiliates

📇 Reinsurance

Question 25

Purpose of the preventive/corrective measures that regulators can take, based on the risks identified during the on-site and offsite regulatory monitoring

Answer 25

Correct problems to prevent insolvencies

Question 26

List some preventative/corrective measures that regulators can take, based on the risks identified during the on-site and offsite regulatory monitoring:

Answer 26

📑 Requiring the insurer to provide and updated business plan

🗂 Requiring the insurer to file interim financial reports

🚫📉 Prohibiting the insurer from certain investments or investment practices

⛔️ Restricting or suspending the business that can be written or renewed

💸 Ordering an increase to the capital and surplus

📜 Ordering an insurer to correct corporate governance practice deficiencies

👥 Requiring replacement of senior management

⚖️ Seeking a court order to place the insurer under conservatism, rehabilitation, liquidation

Question 27

Two reasons that receivership laws exist

Answer 27

1️⃣ Prevent insolvencies

2️⃣ Minimize losses and protect policyholders before/during an insolvency

Question 28

List four alternatives to the insolvency that regulators will consider

Answer 28

1️⃣ Mergers or acquisitions

2️⃣ Reinsurance arrangements

3️⃣ Non-renewal of part or all the business

4️⃣ Placing the insurer into run-off mode

Question 29

The US financial regulatory system consists of a three stage process.

List the three stages:

Answer 29

1️⃣ Regulators limit/ eliminate risks via restrictions and prior approval requirements

2️⃣ Financial oversight

3️⃣ Regulatory backstops and safeguards (guaranty funds and RBC)

Question 30

Why did regulators begin to oversee and restrict insurer investments

Answer 30

In the 90s, several insolvencies were caused by high risk investments. To help reduce insolvencies, regulators began to oversee and restrict insurer investments.

Question 31

Compare the “defined limits approach” to the “define standards approach”

Answer 31

📊 Defined Limits approach: limits on the amount that can be invested in different assets

💸 Defined Standards approach: insurers need to follow a “prudent person” approach, where they are given more flexibility as long as they follow a sound investment plan

Question 32

What is the most common cause for regulator intervention in the operation of the insurer

Answer 32

Hazardous financial condition

☣️💰

Question 33

List some factors that may lead a regulator to believe that a company is in a hazardous financial condition

Answer 33

🕵🏼 Adverse findings in financial analysis or exams, audit, actuarial opinion, cash flow and liquidity analysis

⌛️Insolvency of the insurer’s reinsurer or within the insurer’s holding company system

🤡😈👨🏻‍💼 Finding of incompetent or unfit management

🤥 Failure to provide accurate information

☣️ Any other findings determined to be hazardous to policyholders, creditors or general public

Question 34

Three goals of assessing the financial condition of an insurer

Answer 34

🧐 Identify potential adverse financial indicators as quickly as possible

🕵🏻‍♂️ Evaluate and understand the problems more efficiently

👷🏻‍♂️Develop corrective plans sooner, in order to decrease the frequency and severity of insolvencies

Question 35

Three components of the risk focused surveillance by regulators

Answer 35

👨🏻‍💻 Financial analysis

👩🏼‍⚕️Financial examination

👨🏽‍🔧 Supervisory plan development

Question 36

List four priorities of SMI

Answer 36

📄Create a document that articulates the US insurance regulatory system

🧐 Examine international developments for potential use in the US

📋 Comply with International Association of Insurance Supervisors (IAIS) and Insurance Core Principles (ICP)

🌎 Apply lessons from the global financial crisis

Question 37

What does the federal Non-admitted and Reinsurance Reform Act (NRRA) prohibit:

Answer 37

Prohibits a state from denying credit for reinsurance, if the domiciliary state:

▫️ Has recognized credit for reinsurance, and

▫️ Is an NAIC accredited state

Question 38

List another rule listed in NRRA

(in addition to prohibiting a state from denying credit for reinsurance)

Answer 38

Assigns the domiciliary state the sole responsibility for regulating the reinsurer’s financial solvency.

Question 39

List some criteria that reinsurers need to meet to be eligible for/ maintain certification

Answer 39

💪🏼 Financial strength

⏰ Timely claims payment history

🧾 Requirement that insurer is domiciled and licensed in a “qualified jurisdiction”