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

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

3. HISTORY State 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. Inappropriate pricing Inappropriate underwriting Bad product mix Inadequate reserves Inadequate reinsurance program Poor claims administration Insolvencies - Specific Causes

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

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