Ettlinger, Chapter 8: Regulating Insurer Insolvency
When all else fails, the regulator seeks for authority to shut down the insurer and begin the liquidation process.
When to take control requires financial and admin judgment:
How accurate are loss reserves?
If assets are liquidated, what would proceeds be?
Has mgt enacted tough enough measures to stem operating losses?
Is company’s reinsurance adequate and collectable?
Role of Actuaries and Accountants – used to assist in preparing, evaluating, and auditing financial records/reports made to regulators and others.
Need for Coordination – sometimes a domiciliary commissioner may discourage other state’s commissioners from taking action against an insurer because of what it could do to the domiciliary state (lost jobs, etc). NAIC has helped to fight this “home state first” attitude.
Insurance Receiverships – these are extraordinarily complex activities involving receivers, courts, and guaranty funds.
Rehabilitation – goal is to stabilize the company while a more permanent solution is found.
Rehabilitator = usually a retired insurance executive or experienced attorney. 1st challenge is to stabilize company’s cash flow and protect assets from creditor claims.
Then – if properly managed, can it still meet policy claims and other liabilities?
To avoid liquidation, the following must be resolved:
How will loss reserves develop?
Can expenses be trimmed quickly?
Are rates too far from being actuarially adequate to meet costs?
Can rates be raised w/o destroying the company’s ability to market to its desired market segment?
Liquidation – happens if beyond rehabilitation.
Liquidator = a special deputy assigned by commissioner. He can seize and dispose of assets, hire/discharge personnel, enter contracts/lawsuits, manage affairs of insurer. He must freeze and quantify the insurer’s liabilities; and marshal the assets and convert them to cash.
Liabilities must be frozen quickly. Policies are cancelled and deadlines set for claims.
1st few months can include the following liquidator activities:
give out liquidation notices to creditors and P/Hs and inform them of rights;
cancel policy cvg;
notify agents of their duties in the liquidation;
identify, sell, collect assets;
recover improperly transferred assets;
establish procedure for receiving/adjudicating claims;
make decisions regarding insurer’s staff and hire outside help as needed.
Liquidator often in court handling claimants, reinsurers, former management, other state regulators, guaranty funds. Admin expenses can seriously erode the insurer’s assets.
Years later, remaining assets distributed usually in this priority: