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Insurance Law

Regulation Of Insolvency – New Appleman on Insurance Law Library Edition, Chapter 98

By Kristen J. Brown


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This chapter examines the powers and remedial options afforded to state insurance commissioners for their regulation of insurance company insolvency. State laws arm insurance commissioners with broad intervention powers and various degrees of intervention options designed to both avoid and, when necessary, respond to the ultimate failure of an insurance company due to insolvency.  The intervention options range from financial monitoring to complete takeover and dissolution of an insurance company. The commissioner of insurance has broad discretion to apply these intervention options to address a particular company’s financial risk.

Section 98.01[1] explains the state-based insurance regulatory framework in the United States.  Under this framework, state insurance commissioners in each of the United States regulate both the solvency and insolvency of insurance companies domiciled or transacting business in the state. Section 98.01[1][a] and [b] introduce the state insurance laws governing insurance company insolvency and explain the role of the National Association of Insurance Commissioners (“NAIC”) in developing those laws in order to foster uniform, nationwide insolvency intervention standards.  These sections also explain how insurance insolvency laws protect and prefer policyholders over an insolvent company’s other unsecured creditors because policyholders have historically been viewed as least able to bear the potentially tragic loss of insurance when an insurance company fails. 

Although state law primarily controls state regulation of insurance, including insurance insolvency matters, Congress has, from time to time, considered whether to expand federal regulation of insurance.  Most recently, Congress enacted the landmark Wall Street Reform and Consumer Protection Act, also known as the Dodd-Frank Act. Section 98.01[1][c] provides an overview of the impact of Subchapter II of the Dodd-Frank on states’ regulation of insurance company insolvency in the unlikely, yet potentially catastrophic, liquidation of a nationally significant insurance company similar to AIG.  Section 98.01[1][c] also addresses more common federal law issues arising in insurance company insolvency proceedings, in particular efforts of the United States to assert the federal priority statue in an attempt to improve its payment priority position in relation to policyholders or other unsecured creditors in a state court insurance receivership action. 

Section 98.01[2][a] goes on to explain some of the ways insurance regulators determine whether there is insolvency risk sufficient to warrant some form of regulatory intervention.  State statutes require that insurers in a particular line of business (e.g., all life insurers) have a minimum amount of capital and surplus to initially obtain and then retain a certificate of authority to write insurance in the state. As a result of a several large company insolvencies indicating that these set standards may not alone adequately protect all insurance companies, state regulators developed additional NAIC model Risk-Based Capital (“RBC”) rules and formulas that improve regulators’ ability to measure whether a particular company has sufficient capital to cover all of the risks that company insurers.  Under these rules, insurers are required to calculate and report levels of Risk-Based Capital.  Insurance regulators have a basis to intervene in the financial affairs of an insurance company if the company fails to maintain minimum capital and surplus amounts or falls below authorized levels of Risk-Based Capital.  The RBC rules prescribe the regulatory intervention authority and actions to be taken when an insurance company’s Risk-Based Capital falls to certain levels.  

Regulators also have standards for determining whether an insurance company is at risk for insolvency for reasons other than, or in addition to, capital and surplus levels.  The NAIC Model Regulation to Define Standards and Commissioner’s Authority for Companies Deemed to Be in Hazardous Financial Condition and the Administrative Supervision Model Act, also discussed in Section 98.01[2][a], provide additional broad grounds for regulatory intervention, including, for example, when an insurance company engages in unfair or illegal claims practices or its business is otherwise mismanaged. The Hazardous Financial Condition Regulation and the Administrative Supervision Model Act specify that the type of intervention under these laws is an administrative order directing that the insurer take, or not take, certain actions designed to mitigate the risk of insolvency.  Section 98.01[2][a] also explains the statutory bases, including but not limited to insolvency, for the most severe and generally last resort intervention option  - a judicial receivership action.

Section 98.01[2][b] discusses the broad discretion afforded state insurance regulators in assessing insolvency risk for purposes of determining whether there is a basis to intervene in an insurance company’s affairs and, if so, when and how to intervene.  Section 98.01[4] explains that an insurance company has the opportunity to request confidential administrative proceedings to review the regulator’s administrative orders, usually attempted prior to receivership, arising under the RBC laws, the Hazardous Financial Condition Regulation and the Administrative Supervision Model Act.

Section 98.01[3] explains in more detail the more intensive intervention options regulators usually rely upon after they determine that the basis for regulatory intervention is the actual or near insolvency of an insurance company.  Sections 98.01[3][a] and 98.04 focus on the Administrative Supervision Model Act, under which the regulator exercises more intensive supervision and controls certain company transactions.  Section 98.04 discusses confidential seizure proceedings, and Sections 98.01[3][c] through 98.01[3][f] explain the insurance commissioner’s complete takeover of a severely troubled insurance company through a state court receivership action.   

All states have insurance insolvency laws that confer exclusive standing upon the state insurance commissioner to file a petition against an insurance company in state court requesting the court to enter an order placing the company into formal receivership and appointing the insurance commissioner as receiver when the commissioner can show that any one of several statutory grounds for receivership exist.  Section 98.01[3][c] sets forth all of the possible grounds for receivership; chief among them is insolvency.  While receivership is required or inevitable when the company is legally insolvent, there are other bases for receivership intervention.  The regulator is not required to wait until an insurance company is legally insolvent to place a troubled company into receivership.

There are three kinds of insurance company receivership under the most recent NAIC model insurance receivership act: 

  • ·   Conservation, under which the insurance commissioner is appointed as the conservator of the insurance company for the primary purpose of investigating the true financial condition of the company with a goal of correcting financial problems and restoring the insurer to normal operations in a short period of time. Conservation is discussed in Section 98.01[3][d].

  • ·   Rehabilitation, which is similar to conservation, in that the insurance commissioner is appointed as the rehabilitator for the purpose of forming a rehabilitation plan to reorganize, reform and revitalize the insurer.  Alternatively, a rehabilitation plan can propose to wind up the insurer’s operations by paying and eventually running off its liabilities in a manner that provides a “softer landing” for policyholders and creditors than a liquidation order.  Rehabilitation is discussed in Section 98.01[3][e].

  • ·   Liquidation, under which the insurance commissioner is appointed as the liquidator for the purpose of marshaling the insurer’s assets, liquidating them and distributing the cash pro-rata to policyholders and creditors pursuant to a statutory priority distribution scheme, and then dissolving the company. Liquidation is often viewed as a last resort because there is no prospect the company can be reorganized and little prospect of paying all creditors in full.  Liquidation is discussed in Section 98.01[3][f].

Complications and conflicts can arise when an insolvent insurance company transacts business in multiple states.  Sections 98.01[4] and 98.02[7] explain that states coordinate the regulation of insolvency of multistate insurers by, in most cases, deferring to the insurance commissioner in the insurer’s state of domicile (incorporation) to lead receivership intervention.  Insurance regulators in other states where the insurer is licensed generally take administrative action to suspend or cancel the company’s insurance license.  Many state laws still authorize non-domiciliary commissioners to initiate their own receivership action, called an “ancillary receivership,” after the domiciliary regulator has filed for a receivership order.  In most cases, domiciliary receivers do not favor ancillary receiverships because of the increased administrative expenses associated with multiple cases. 

Sections 98.01[5] and 98.01[6] focus on the process for judicial review of judicial receivership orders.

Sections 98.02[1] through 98.02[3] revisit the standards regulators consider when deciding whether to intervene in the financial affairs of a troubled insurer, as well as the tool chest of non-exclusive intervention options regulators may apply in the regulation of insolvency.  Section 98.02[2] summarizes how various regulatory response tools might be combined and applied in response to specific hazardous financial conditions to avoid or respond to insolvency.

Sections 98.02[4] discusses how a troubled insurer’s claims payment history factors into the intervention analysis and response.  Sections 98.02[5] and 98.02[6] and Section 98.03 consider the level of the insurer’s willingness to cooperate with regulators and other non-legal considerations that factor into the regulator’s exercise of discretion in deciding whether, when and how to intervene to remedy conditions posing risk to an insurer’s solvency.   These and other operational and financial considerations regulators use to decide which intervention option to apply and when are also summarized in Section 98.03, whereas choice of law and other additional legal considerations are examined in Sections 98.02[6] and 98.02[7].

The chapter concludes with a discussion of confidential judicial seizure proceedings in Section 98.04. A seizure order directs the insurance commissioner to apply greater intensity in intervention than all of the pre-receivership intervention options because the seizure order directs the insurance commissioner to temporarily seizes control of all of the assets, business and management of the company. A regulator will initiate a seizure proceeding when there is a threat of dissipation of the insurer’s assets and need to quickly ascertain the full extent of the insurer’s adverse financial condition in advance of filing a public receivership action.

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Table of Contents

§ 98.01 Regulatory Framework

            [1] Law Governing Regulation of Insolvency

[a] State Law Governs Regulatory Power to Intervene

[b] Role of NAIC in Developing Uniform State Laws Regulating Insolvency

[c] Impact of Federal Law on the Regulatory Framework

[i] The Dodd-Frank Act

[ii] Chapter 15 of the United States Bankruptcy Code

[iii] Federal Priority Statute

[2] Regulatory Power to Intervene

[a] Determination of Basis for Intervention

[i] Intervention Is Authorized When There Is a Suspicion or Finding of Insurer Hazardous Financial Condition or Insolvency

[ii] Failure to Maintain Minimum Capital and Surplus

[iii] Risk-Based Capital (“RBC”) Control Level Events

[iv]  Violation of State Insurance Regulations – Hazardous Financial Condition

[v]   Basis for Intervention in the Form of Administrative Supervision

[vi]  Grounds for Receivership Intervention 

[b]  Regulatory Discretion in Exercising the Power to Intervene 

[c]  Administrative Review

[i]   Orders Addressing Hazardous Financial Conditions

[ii]   RBC Events and Corrective Action Plans 

[iii]   Administrative Review of Administrative Supervision Orders

[d]  Judicial Review

[3]  Regulatory Options Upon Intervention

[a]  More Intensive Supervision

[b]  Management Transitions

[c]  Appointment of Receiver

[d]  Appointment of Conservator

[e]  Rehabilitation

[f]   Liquidation

[i] Liquidation Most Often Occurs When an Insurer Is Legally Insolvent and Cannot Be Restored to Solvency

[ii] Illustrative Case: Failure to Prove Necessity of  Liquidation

[iii] The NAIC Insurer Rehabilitation and Liquidation Model Act (“IRMA”) Vests Broad and Exclusive Powers in the Liquidator

[4]   Regulation of Multi-State Insurers

[5]   Administrative Review After Intervention

[6]   Judicial Review After Intervention

§ 98.02 The Intervention Decision

[1]   Standards for Intervention

[2]   Application of Intervention Standards

[3]   Role of Discretion

[4]   Payment History

[5]   Extra Legal Considerations

[6]   Timing of Determination

[7]   Choice of Law Applicable to Intervention Decision

[8]   Resolution of Conflicts Within and Between Jurisdictions Regarding    Insolvency

§ 98.03  Considerations in Choosing Between Intervention Options

§ 98.04  Greater Intensity in Supervision, Including a Seizure Order

[1]   Regulatory Discretion for Supervision

[2]   Additional Requirements That May Be Applied

[3]   Responding to Greater Intensity in Regulation


Kristen J. Brown is an attorney in Columbus, Ohio. She has extensive experience handling regulatory, policy, litigation, and insolvency matters on behalf of national and international clients in the financial services and insurance industries, including insurance companies, insurance regulators, and national and regional banks.  Ms. Brown has served on a number of insurance industry committees, including the NAIC Receivership Handbook Drafting Committee, the NAIC special ad hoc Dodd-Frank Wall Street Reform and Consumer Protection Act Committee, the Receivership Financial Analysis Working Group ("RFAWG") and as Chair of the NAIC RITF SEC Considerations Sub-Group. Ms. Brown previously served as General Counsel to the Office of the Ohio Insurance Liquidator, representing the Ohio Superintendent of Insurance as the statutory receiver of insolvent insurers, and as the Chief Legal Counsel to the Ohio Department of Insurance. 

The opinions expressed in this chapter are those of the author’s alone.

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