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Ettlinger, Chapter 8: Regulating Insurer Insolvency

Ettlinger, Chapter 8: Regulating Insurer Insolvency

Trends in Insurer Insolvencies

Number of Insolvencies – From 1969 to 1983, insolvency rate mainly less than 0.5% per year.  Starting in 1984, insolvencies became more numerous.

Size, Age and Premium of Insolvent Insurers

New & small companies make up 2/3s of insurer insolvencies from 1970 – 1990.  Due to less experience and less diversification.

In 1980’s and 90’s, large insurers went bankrupt, including the worst: Mutual Benefit Life at $14B in assets.

Insolvencies are exception, not the rule.  In the past 20 yrs, they account for less than 0.25% of written premiums.

Deficits of Insolvent Insurers – as these companies go insolvent, the gap between their debts and available assets has widened, leading to large costs borne by the surviving companies.  Guaranty funds paid most of the O/S-ing claims, but these costs are passed on to other insurers.

How Bad Is the Industry Record?

1990: “Failed Promises” – released by the House Oversight and Investigations Subcommittee of the House Committee on Energy and Commerce.  Documents cases of poor regulation – following a torrent of reforms in 1989.  NAIC adopted new/improved regulatory models, which many state incorporated.

1994: “Wishful Thinking” – released by same subcommittee.  Argues that reforms came too late.  Efforts of NAIC aren’t enough and major collapse of insurance was a possibility.

Lots of insolvencies from 1984 to 1993, but have been corrected through reform legislation (tougher capital requirements) and by market forces.

Also, the insurance problems were nothing compared to the losses of commercial banks and S&L institutions.

All things considered, the insurance record has been pretty good.

Why Insurers Become Insolvent

Most frequent causes include: rapid premium growth (which precedes nearly all major failures); inadequate rates & reserves; out-of-line expenses; lax controls over MGAs; reinsurance uncollectible; fraud.

One problem is how to determine if a company is financially troubled.  This fact can be hidden through a merger (suggested by NAIC).

Regulatory Control – many ways for the regulator to take control of a company.

First form of regulatory intervention is usually fact finding on site or by written reports.  If the company is found to be “hazardous to the P/Hs or to the general public,” they may be ordered to: increase reinsurance; reduce the volume of new and renewal business; reduce operating expenses; increase capital or surplus; limit dividends to S/Hs or P/Hs; limit certain investments; document adequacy of rates.

The commissioner often negotiates voluntary compliance to avoid insurer’s bad publicity.

Sometimes public intervention can result in criticisms of the regulator.  For example: NJ and Executive Life.  NAIC blasted NJ for their actions.

If 1st step fails, the regulator can seek court authority to take control of the mgt (rehabilitation).

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