“Resolution of Troubled Insurers: Protecting Policyholders in the 21st Century”
In the more than two decades since state regulation of insurance was taken to task by Congress and the National Association of Insurance Commissioners (“NAIC”) first propounded its Financial Regulation Standards, financial condition regulation of insurers has taken enormous strides forward. From the risk-based capital regime, through risk-focused examinations to the own risk and solvency assessment process, regulators today have a wealth of tools to identify and monitor risks to insurer solvency. Yet the regulatory system remains biased toward viewing insolvency as regulatory failure, with the consequence that when policyholders are most in need, they are abandoned entirely to the conventional receivership process.
This need not be so. Free-market capitalism demands the failure of enterprises unfit to compete, and the challenge for the state-based system of insurance regulation is to minimize or prevent the public harm resulting from those failures. Integration, or at least closer coordination, of the regulatory and receivership functions can be the means to minimize the consequences of insurer failure. If one views insurer failure as simply part of the natural life cycle of insurers, then one sees many opportunities for resolving troubled companies in ways less injurious to policyholders and the public than conventional receivership proceedings. Whether the regulatory process is used to prepare an insurer for formal receivership, or formal receivership is employed in aid of a restructuring approved by regulators, years of progress have resulted in a state-based system more able than ever before to protect policyholders, claimants and beneficiaries threatened by insurer insolvency.