The Insurance Industry and its Regulation. Insurance is one of the few products sold in the U.S. marketplace on a mass basis in which the buyer (the insured) hands over their money to the seller (the insurance company) long before ever receiving the desired product (namely that the insurer pay their claim when it arises). This means the seller (the insurance company) has the buyer’s money in hand for a long time before delivering the purchased product (paying the claim). Because the money can disappear from insurance companies before the claims are paid, insurance has long been a highly regulated industry. Much of that regulation has been focused on making certain the insurance company still has the money to pay the required claims when they come due. In short, because all sorts of mischief can occur in connection with an insurance company’s money, regulators pay very close attention to that money.
As such, insurance has long been impressed with a public interest and it has been highly regulated by the government from the beginning. Further, because insurance plays such a fundamental role in many elements of personal life (like auto and homeowners insurance) and business (like workers compensation and liability coverage), its conduct and regulation is likewise carefully regulated. Indeed, most transactions of financial consequence that occur in the U.S. economy have a required insurance component.
Although insurance is regulated almost exclusively at the state level (there is no federal department of insurance regulation), those states have brought a high degree of uniformity to regulation. They have done so in part because insurance is a global business and as such must be able to operate across state lines (as well as national borders for that matter) with ease. The states have also brought uniform standards to bear on such insurers so that both the regulators and the regulated companies know in advance the rules that will be applied to most any circumstance.
Each state has a state agency that regulates the business of insurance in the state. The agency, generally called the Department of Insurance or its titled equivalent, is headed up by a chief executive officer generally entitled the Commissioner of Insurance or its equivalent. The Commissioner of Insurance is usually appointed by the states’ governor or elected statewide by voters. The responsibility of the Department of Insurance, working under the direction of the Commissioner of Insurance, is to actively regulate all of the business of insurance conducted in the state. Among other things, this includes approval of policy forms and related premiums, licensing and oversight of insurance agents, and licensing and oversight of all insurance companies operating in the state including the purchase and sale of such insurance companies.
As to insurance companies themselves, the Department of Insurance actively regulates such companies operating in the state by: (i) licensing them in the first instance; (ii) approving or disapproving the acquisition of such insurers (domestic) by new buyers; and (iii) financially regulating such insurers once they are so licensed by examining them on a required periodic schedule, reviewing their financial statements on a required periodic schedule and conducting targeted financial examinations of the insurers whenever necessary. In addition, Departments of Insurance actively regulate insurance companies that are linked together through ownership by way of the Model Holding Company Act.
Every state has two categories of insurance companies, those insurance companies that are home based in that state (so-called domestic insurers) and insurance companies doing business in the state but home based in another state (so-called “foreign insurers”). As to domestic insurers, the home state Department of Insurance has special duties such as the obligation to examine that insurance company on a required periodic schedule. There is nothing that prevents other DOIs in which the insurer operates as a foreign insurer from similarly examining that insurer; it is simply that the home state Department of Insurance has a statutory duty to do so.
The individual states have achieved uniformity in regulation through, among others, the National Association of Insurance Commissioners (sometimes, the “NAIC”), an organization consisting of the Commissioners of Insurance of the 50 states. The NAIC operates much like a legislature and meets four times a year to consider insurance issues and take appropriate action. Through the NAIC, the individual states have been successful in promulgating uniform laws and administrative regulations (generally referred to as Model Acts and Model Regulations). Each state then is free to adopt such acts or regulations as their own. For example, the NAIC has adopted the Model Holding Company Act including its Form A, which regulates the acquisition of control of insurers and sets forth reporting requirements and related duties relating to holding companies.
In addition, the NAIC has also promulgated other uniform standards including how financial examinations will be conducted (the NAIC Financial Examiners’ Handbook) and how financial statement of insurers will be examined (the NAIC Financial Analysts Handbook).
The Form A, though the subject of individual state legislative enactment and related state administrative regulation, is generally derived from the NAIC Model Holding Company Act (sometimes, the “Model Act”). The purpose and intent of the Model Act makes clear that it is to serve the public interest and protect policyholders.
More to the point, its purpose is to prevent incompetents, dishonest individuals, criminals and would be criminals (collectively, financial thieves) from gaining control of insurance companies. The need for the Model Act is driven by the fact that as discussed earlier, insurance is one of the few products sold in the U.S. marketplace in which the seller (the insurance company) collects and lawfully possesses the buyer’s money (the premium) long before delivering the purchased product (the payment of claims that arise under the purchased policy).
As such, insurers have significant amounts of cash, cash equivalents and other assets (that are generally not collateralized) that are a natural target for professional looters and the like. To counteract the attacks of professional looters, regulators have been girded with a series of tools designed to ferret out and bring to the surface the would be looters before they have a chance to begin their looting. One of those tools was the Model Act, including its accompanying Form A.
Form A Provisions: A representative Form A generally shows the following provisions:
- A mechanism to obtain the identities and backgrounds of the parties proposed to be in control of the target insurer, that is, the ultimate controlling person(s);
- The qualifications of such persons;
- Other individuals associated with the ultimate controlling person;
- The method of acquisition; including the nature, source and amount of consideration to be paid and how the purchase price itself was determined;
- The future plans for the target insurer; and
- Any other information about the acquiring party the regulator believes is required to carry out the purposes of the act.
Tools available to regulators in conducting their investigation of a Form A application may include:
- The review of financial data as to both the target insurer and the ultimate controlling person;
- The review of databases, including both public (i.e., government databases) and private;
- The review of other state insurance DOIs knowledge, awareness and data as to the players to the transaction;
- Subpoenas for documents and witnesses;
- The taking of statements of witnesses under oath, including third parties and parties in possession of data or information about the parties to the transaction such as employees of the acquiring entity and the target insurer;
- Utilizing experts and consultants to retrieve and analyze information pertinent to the transaction;
- Accessing state and federal securities regulators and their databases (e.g. state securities databases, SEC databases, and those of the self regulatory organizations like the NASD etc.);
- Examining the target insurer at will, with as many resources and as much time as required to answer any and all concerns;
- Examining the acquiring insurer (or holding company or other acquisition vehicle) at will, with as many resources and as much time as required to answer any and all concerns;
- The power to trace all assets to their point of origin and validate the existence of any and all assets; and
- The power to investigate those who handle the insurers’ monies..
1. Expertise As to the Solvency Regulation of Insurance Companies. From an educational standpoint, I hold a B.A. in mathematics, an M.Ed. in educational psychology and a J.D. from the University of Illinois and am a member upon examination of The Florida Bar along with other state bars (Illinois and Iowa, both by examination).
A. Expertise: Insurer Solvency. I have had extensive and substantive experience relating directly to insurer solvency regulation. As a regulator for eight years in three positions ((i) Assistant Attorney General assigned to the Department of Insurance (Iowa), (ii) First Deputy Commissioner of Insurance and (iii) Commissioner of Insurance), along with my staff, I had responsibility to determine on a daily basis the solvency (or insolvency) of every insurer doing business in the state (some 1,500 such insurers, including both domestic and foreign insurers).
B. Expertise: Quarterly and Annual Financial Statements. Solvency is typically tested through the review of quarterly financial statements provided by every such insurer. It can be further tested through the annual submission of a comprehensive financial statement. These statements permit regular and periodic review of the insurer’s solvency. My agency conducted the ongoing review of such financial statements and then took that action required by the statement.
C. Review by the NAIC. Further, the annual statements are reviewed upon submission by representatives of the NAIC to determine whether red flags exist portending insolvency concerns. These red flag concerns are then transmitted to the domiciliary state for their action.
D. Triennial Financial Examinations. In addition, state insurance regulators physically go into insurers on a periodic basis (every 3 to 5 years or sooner as conditions require) in order to conduct financial examinations and in order to validate the existence of the insurer’s claimed assets.
E. Insurer Solvency Expertise: Action Taken from the Financial Analysis. Upon completion of each insurer’s financial review, my Department would determine what regulatory action if any was to be taken. For those insurers who were in excellent financial condition, they were permitted to continue in business. For insurers showing marginal solvency, they were placed under formal regulatory control, with the control varying by the degree of needed oversight ranging from (i) supervision to (ii) rehabilitation to (iii) a declaration of insolvency, with liquidation as the follow up.
F. Insurer Solvency: the American Academy of Actuaries. Along these same lines, I served as General Counsel and chief lobbyist to the American Academy of Actuaries, Washington, D.C. The Academy is the national professional association for actuaries. These professionals establish key elements of an insurer’s financial statements including the level of required reserves, which is the primary liability of an insurer.
G. Insurer Solvency: CEO of Major Property Casualty Entity. From 1990 to 1998, I served as President and Chief Executive Officer for the National Council on Compensation Insurance (“NCCI”; as domiciled in Florida), a nationwide property casualty industry owned organization with about 1,500 employees with annual revenues of about $150 million that did (and does) business in about 40 states.
This means that while I was CEO, NCCI was subject to the full authority of the some 40 DOIs and subject as well to the Insurance Codes of the various states as well as the jurisdiction of all such state’s courts, including federal related federal courts.
H. Insurer Solvency: Monitoring NCCI Member Companies. Among my responsibilities at NCCI was (together with my staff) to monitor the ongoing solvency of NCCI’s 600 insurance companies. The reason for the monitory was quite simple: NCCI was funded based on assessment of its member companies and insolvent insurer/members cannot pay their assessments and as such, termination of services at the earliest possible point in time is fundamental
I. Insurer Solvency: NCCI; Industry Standards of Practice. While President and CEO of NCCI, I visited and physically toured and reviewed in excess of 400 insurance companies and gained direct exposure to the procedures and processes and standard industry practices of the U.S. insurance community solvency practices. I have had extensive exposure to insurer solvency matters.
J. Insurer Solvency: Attorney in Private Practice. As an attorney in private practice, I represented a number of agent and insurer interests and became familiar with applicable regulatory and industry solvency standards of practice. Those interests included the position of Iowa Counsel to the National Association of Independent Insurers, the trade association of smaller stock property casualty insurers.
Specific duties as counsel at the NAII included in-depth familiarity with their insurer members, including daily counsel to member insurers as to solvency matters.
2. The Sale of Insurance Companies. I have had significant experience in the sale of insurance companies. Such transactions generally require prior state DOI approval before the transaction can proceed. That is to say, the sale of all insurance companies in the U.S. must be preceded by the domestic state DOI analysis and approval (if in fact it is granted) before the sale can be consummated.
Expertise: Form A Approvals: Purchase of Insurance Companies. As Commissioner of Insurance, I had ultimate responsibility for consideration, review, investigation and final decision-making authority over Form A filings made with the Department. As Commissioner, I conducted the Form A proceedings with the utmost of seriousness, given the magnitude of the issues and required staff time to accomplish this objective. I am very familiar with the relevance and requirements of such approvals.
Contact Bill Hager at 561-306-5072 or via email to discuss your case.