Ettlinger, Chapter 8: Regulating Insurer Insolvency
NAIC Reforms – NAIC continues to reform itself. For example, they can produce a uniform data reporting standard from guaranty funds to liquidators. But can each state be compelled to adopt the model? And will every state implement it in the same way?
Interstate Compacts – binding agreements among states that subordinate individual state lawmaking to the compact authorities acting in their scopes of responsibility. These are already in place for pollution, ports, and parental responsibility. Can these also be used to help solve problems of interstate liquidation of insurers?
Federalization – should Congress intervene?
Wilcox, "The US Guaranty Association Concept at 25," – SK
Flaws in the System
The Three Abiding Principles – or problem areas:
1. The loss of risk protection when an insurer goes insolvent.
2. The insufficiency of funds when going insolvent.
3. The delay in payment.
The Property and Casualty Scorecard (starting on page 385)
Principle I: Risk Protection
The Statutory Antidote
Duty to Defend
Principle II: Sufficiency of Payments
Claim Payment Percentages and Impact of the Limitations
1) Claims maximum – at first Prof Kimball rejected the need for such a maximum, but in the past 25 yrs, it’s evident that the lack of a max would have allowed one claim to drain resources that could have helped other individuals. About 1 out of 1000 actually reach the state max (usually $300K).
2) Net worth restriction – at first Prof Kimball intended even the major commercial insureds should be covered because of their importance for the economy and jobs. But then he began to call for the removal of selected cvgs for many kinds of insurance that protect mainly large businesses.
3) Lines excluded from cvg – title, warranty & service contracts, OM, govt insurance all present problems distinct from those of P&C insurance. Fidelity, surety & financial guaranty excluded because of their financial protection nature – deemed inappropriate under NAIC’s Model’s focus.
4) Claims of other insurers and reinsurers – they can do fine on their own.
Strains on Capacity
2) Per-State Capacity
Principle III: Speed of Claims Resolution