October 22, 2008
Kathryn Belfi, Chair
Restructuring Mechanism for Troubled Companies Subgroup
c/o David A. Vacca, CPA
Senior Financial Analysis and Receivership Manager NAIC Financial
Regulatory Services Division
2301 McGee Street, Suite 800
Kansas City, MO 64108-2604
Dear Ms. Belfi:
Our board has identified several topics for your consideration that we hope will be
addressed in the white paper under development by the NAIC’s Restructuring
Mechanisms for Troubled Companies Subgroup.
Consumer protection. As do regulators, the state guaranty funds approach the question
of insurance company failure from the perspective of consumer protection, i.e. what is the
best way, as a matter of public policy, to mitigate the damage to policyholders and
claimants when an insurance company becomes insolvent. Toward that end, the existing
system of state priority laws and guaranty fund statutes provides:
• Claimants covered by the guaranty funds are entitled to have their claims paid
promptly. Most of these average personal lines consumer claims are paid in full,
subject to policy limits.
• Through priority liquidation statutes, claims not covered by the guaranty funds, or
claims in excess of the statutory guaranty fund claim caps can still be paid by the
liquidator.
• If remaining estate assets are insufficient to pay all policyholder level claimants
in full, the priority statutes in the state liquidation acts ensure all policy claimants
will at least receive the same percentage distribution, thereby protecting against
unfair or preferential treatment.
• Because the policyholder level claims must be paid in full before lower level
claims, the insolvent company’s limited resources are available to pay claims of
policyholders and consumers ahead of claims of reinsurers, the government, or
general creditors.
October 22, 2008
Kathryn Belfi
Page # 2
These provisions represent significant public policy choices debated and voted on by
state legislatures over the past 40 years. In our observation, these unambiguous statutory
protections are often not present in runoffs.
We recognize a regulator must make difficult decisions when confronted with a troubled
company and that liquidation may not always be the best immediate course of action. As
we understand the purpose of the white paper, it is not necessarily to endorse the use of
run offs or other alternates to liquidation but to provide regulators with a reference to
evaluate the run off alternative. However, the existence of long-standing consumer
protections available through liquidation and their absence from mostly untested and
largely unexamined alternatives begs the fundamental public policy question: if consumer
protection is already built into state statutes, what is the purpose of alternatives such as
runoff? And, are runoffs ignoring the existing statutory consumer protections?
The NAIC’s paper will be enhanced if regulators are provided the entire spectrum of their
options when faced with an impaired carrier; the potential for conflict between non-
statutory alternate mechanisms and the existing public policy protections for insurance
consumers embodied in the existing state guaranty fund and receivership laws must be
reconciled for the benefit of consumers and taxpayers.
Only if the desired outcomes of liquidation alternatives are known in advance can
informed decisions be made about how the system should be designed and operated and
how success or failure will be measured. Once this purpose is established, attention can
be turned to other issues critical to policyholders and claimants, such as:
• The current system of liquidation statutes and guaranty fund statutes are based
upon a clear public policy objective of protecting consumers. We believe the
objective of protecting consumers should form the foundation of any alternative
mechanism for dealing with financially troubled insurers. To the extent consumer
protection may be lacking in some alternative mechanisms, what is the
justification and support for this change in public policy?
• What data must be captured to enable policymakers to determine whether a runoff
is meeting its objectives? Specifically, what is the measure of a successful runoff
or a failed runoff, i.e. the point at which the company must be liquidated and what
is the impact on the state guaranty funds, policyholders, taxpayers and other
stakeholders when that occurs?
• The existing system has a rational and clearly defined mechanism for determining
the winners and losers in the event of insurance company liquidations. The rules
are fixed by the state legislatures and are open and available for all to see.
Advance knowledge of the “rules of the game” give all policyholders and
creditors the opportunity to understand the treatment they can expect to receive in
a liquidation, and a standard against which they can seek redress if those statutory
rights are not provided. The rights of claimants in an alternative mechanism
should not vary from one plan to the next based upon the judgment and discretion
of the receiver, thereby creating the potential for claims of arbitrary or preferential
October 22, 2008
Kathryn Belfi
Page # 3
treatment. How claimants fare in an alternate mechanism should be set forth in a
statutory framework within which the alternate mechanism will be conducted.
• Should alternate mechanisms permit claims settlement practices that would not be
permitted if performed by insurers that were not in some form of receivership
proceeding? If yes, what practices should be allowed and under what public
policy rationale? Should the alternate mechanism provide consumers a
meaningful enforcement mechanism through which they can seek protection from
alleged unfair claim settlement practices?
Transparency and accountability. Insurance insolvencies involve many millions of
dollars and potentially place a financial burden on insurance consumers and taxpayers.
Any alternate mechanism that calls for an expenditure of public resources or reduces
existing consumer protections should be closely monitored and accountability established
for its success or failure. Alternatives to statutory liquidation should be subject to
rigorous information reporting standards with this information made available to all
claimants and interested parties on a timely and equal basis. The mechanism should be
overseen by a court of competent jurisdiction to monitor progress in order to determine if
the mechanism is meeting its stated objectives. Finally, a mechanism should ensure that
consumers are not improperly deprived of either policy benefits or statutory protections.
Conclusion. Insurance insolvencies are and will continue to be a fact of life so long as
we operate under a free enterprise system. There will always be a significant public
interest in seeing that policyholders and claimants receive the highest possible return on
their claims, that they are treated fairly, and that the overall costs to the system, which are
ultimately borne by the public, are kept as low as possible. It is of paramount importance
that consumers be treated fairly and equitably and that the public’s trust that the promises
made in the insurance contracts issued by the failed company be kept to the greatest
extent possible.
We hope the white paper will serve as a catalyst for careful examination and discussion
of all these issues.
Please don’t hesitate to contact me if the NCIGF in any way can assist you in the future
with this project.
Sincerely,
Roger Schmelzer
President and CEO