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INSURER INSOLVENCIES

This document provides a comprehensive overview of insurer insolvencies in Alaska, detailing the historical context, causes, and regulatory responses. It highlights key issues such as fraud, mismanagement, and inadequate reserves that lead to insolvencies, as well as the regulatory framework guiding these proceedings. The roles of the Insurance Commissioner, receivership processes, and state statutory provisions are examined. Additionally, it outlines the guaranty fund system, covering protections for policyholders and recovery mechanisms post-insolvency.

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INSURER INSOLVENCIES

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  1. INSURER INSOLVENCIES Alaska Division of Insurance Bob Lohr, Director bob_lohr@dced.state.ak.us

  2. HISTORYSource of Authority • 11 U.S.C . § 109 (b)(2) • “Domestic Insurance Companies” Excluded • Areas of Uncertainty • Health Care Entities • Mutual Holding Companies

  3. HISTORYState Regulatory Scheme • State Statutes • Extent of Jurisdiction • Insurance Commissioner Commences Proceeding • Insurance Commissioner Appointed Receiver • State Court Supervises Proceeding • Receiver’s Actions Reviewed Under Abuse of Discretion Standard

  4. Insolvencies - Two Main Causes • Fraud • Mismanagement

  5. Insolvencies - Specific Causes • Looting • Transactions with affiliates • Rapid growth • Premium outgrows surplus • Expansion into new lines of business • Expansion into new geographic areas

  6. Insolvencies - Specific Causes • Inappropriate pricing • Inappropriate underwriting • Bad product mix • Inadequate reserves • Inadequate reinsurance program • Poor claims administration

  7. Insolvencies - Specific Causes • Uncollectible reinsurance recoverables • Assumed reinsurance • Bad investment strategy • Excessive Expenses • Lack of effective internal controls

  8. REGULATORY RESPONSES Monitoring Tools Quarterly and Annual Financial Statements Risk Based Capital Reports Audited Financial Statements Financial Examinations

  9. REGULATORY RESPONSES • Administrative • Warning Letter • Corrective Order • Supervision

  10. REGULATORY RESPONSES • Judicial • Seizure • Conservation/Rehabilitation • Liquidation

  11. REGULATORY RESPONSES • Seizure • Court May Issue Ex Parte Seizure Order • Full Hearing Within 7-30 Days

  12. REGULATORY RESPONSES • Rehabilitation • Receiver Must Determine Whether Insurer Can Be Rehabilitated • Receiver Prepares Plan • Supervising Court Determines Whether to Approve Plan • If Approved Plan Put into Effect

  13. REGULATORY RESPONSES • Liquidation (typical) • Fixing Date Established • Cancellation of Policies • Voidable Preferences • Claims Bar Date Established • Assets Marshaled and Liquidated • Claims Adjudicated • Distribution to Creditors According to Liquidation Priority Statute • Closure of Estate

  14. REGULATORY RESPONSES • Liquidation (life insurer) • Nature of Contracts such that Cancellation Is not Good Option • Put Blocks of Business out for Bids • Arrange for Assumption of Policies by Healthy Insurer

  15. MULTISTATE INSURER INSOLVENCIES

  16. GUARANTY FUND SYSTEM • Created by State Statute • Typically Separate Entities for Property/Casualty and Life/Health • All Licensed Insurers Are Required to Participate • Post Insolvency Pro Rata Assessments • Various Recoupment Mechanisms

  17. GUARANTY FUND SYSTEM • Property/Casualty Guaranty Funds • Coverage Up to $300,000 Per Claim • No Limit for Workers’ Compensation • Net Worth Exclusion • Assume Responsibility for “Covered Claims”

  18. GUARANTY FUND SYSTEM • Life/Health/Annuity • Life • $300,000 Death Benefits • $100,000 Cash Surrender/Withdrawal • Health • $500,000 Basic Medical • $300,000 Disability • $100,000 Other

  19. GUARANTY FUND SYSTEM • Annuities • $100,000 Individual • $100,000 Structured Settlement • $5,000,000 Unallocated Contracts • Equity-Indexed Products • Interest Rate Rollback • May Assume Responsibility for “Covered Claims” • May Participate in Assumption Reinsurance Transaction

  20. ISSUES IN THE INSOLVENCY ARENA • Priority of Federal Claims • Long Tail Liabilities and Closing Estates • Managed Care Organizations

  21. RESOURCES FOR REGULATORS • National Association of Insurance Commissioners (NAIC) Publications • Receivers Handbook for Insurance Company Insolvencies • Directory of Resources to Assist Receivers of Insolvent Insurance Companies • Website: naic.org • NAIC Insolvency Counsel • Doug Hartz • E-mail: dhartz@naic.org • International Association of Insurance Receivers (IAIR) • 1/3 of members are from United Kingdom and other countries • Website: IAIR.org

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