Accreditation Review Process and Procedures
NAIC Committee Adopts Proposed Revisions Related to Captives
The proposed revisions would add certain captive insurers and special purpose vehicles into the accreditation program
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Julie Garber, CPA
Sr. Manger, Solvency Regulation
Last Updated 2/06/18
One of the primary objectives of insurance regulators is to identify, as early as possible, insurance companies that are showing signs of becoming financially troubled so corrective action can be taken to protect policyholders, claimants, and creditors from financial loss.
A troubled insurance company is generally defined as a company that either is in or is moving toward a financial position that subjects its policyholders, claimants and other creditors to greater-than-normal financial risk, including the possibility the company may not maintain compliance with the applicable statutory capital and/or surplus requirements.
The opportunity and ability to save a troubled insurance company from insolvency and liquidation, and thereby minimize any loss to policyholders and creditors, generally diminishes the longer a troubled company continues to operate in an adverse financial condition. Therefore, special procedures should be designed and implemented by insurance regulators to identify potential troubled companies in an early stage.
State insurance departments routinely perform a variety of functions to monitor the financial condition of insurance companies. Such monitoring activities would ordinarily include the collection and analysis of annual and quarterly financial information, desk audits of financial information, SEC filings and other holding company filings, the collection and review of information in connection with the licensing or admission of companies, and review of RBC (Risk-Based Capital) reports. At times, the gathering and analysis of financial information, by itself, may not be sufficient to identify a troubled company situation and analysis of the operational aspects of the company (e.g., market conduct) should also be considered.
Operational and financial conditions need to be considered together with other corroborative information to reach a conclusion as to whether an insurance company is troubled. The additional information to corroborate these findings might be obtained through communications with other insurance departments or through requests for additional information from the company.
The NAIC Financial Analysis Working Group (FAWG), offers a layer of peer review for each regulator's solvency monitoring efforts, thus ensuring that experienced state regulator colleagues improve and enhance state regulator judgments regarding a company's financial condition. FAWG ensures state insurance financial regulators share information and ideas in their work to identify and monitor potentially troubled insurers. With its regular meetings FAWG provides the efficient means of facilitating and increasing communication between the state of domicile of the troubled company and other interested state regulators.
When state regulators identify a troubled company, they must decide on the most appropriate courses of action. Regulators should be prepared to act quickly, if necessary, to stabilize a troubled situation and to prevent further deterioration. Preliminary actions may include instituting controls over operations or transactions, including access to and use of the company's assets. Most state insurance departments have adopted the NAIC's Risk-Based Capital for Insurers Model Act which requires specific action on the part of the company, the department, or both, when a company's RBC ratio falls below specified levels.
Among corrective actions that may be undertaken by regulators are: taking control of the company's assets (monitor the sale or purchase of assets), changing the company's management, changing the company's operations, raising new capital, entering into reinsurance transactions, changing the mix of the company's asset portfolio, merging with a financially sound insurance company, and selling certain assets.
At some point, the insurance department may determine that the company situation cannot be corrected or the corrective plan cannot be completed successfully. In those circumstances, state regulators may determine the appropriate course of action is to place the troubled company in receivership.
Among the typical causes of insurer insolvency are: undercapitalization; uncollectible or inflated assets; insufficient loss reserves for risks assumed; agents who misappropriated or improperly handled money belonging to the insurer; problems involving reinsurance, e.g., insolvency, disputes, collectability, etc.; unprofitable lines of business/inappropriate underwriting or claims management; risky investments; fraudulent transactions; failure to monitor agents; and mismanagement by directors and/or officers.
Insurer insolvencies are governed by state law, rather than federal bankruptcy law. State statutes typically provide for the appointment of the insurance commissioner as receiver of an insurer. Although insolvency is governed by the law of the state in which the insurer is domesticated, the laws of the various states in which an insurer conducted business may also be implicated. Consequently, during the takeover and administration of an insolvent insurer, it is important for the receiver to consider the laws of those states.
Three distinct forms—conservation, rehabilitation, and liquidation—can be distinguished in the receivership proceedings. Most states have enacted statutes that govern the conservation, rehabilitation and liquidation of insurance companies and are patterned after three models acts (the Uniform Insurers Liquidation Act, the Insurers Rehabilitation and Liquidation Model Act, and the Insurer Receivership Model Act) that have been adopted by the NAIC
The receiver organizes the assets of the insurer, determines the liabilities of the insurer to policyholders and other creditors, and distributes the assets in satisfaction of such claims in accordance with a priority-of-distribution scheme prescribed by state law. Most state insurance departments maintain a list of companies in receivership/liquidation on their website.