Navigating “The Quiet Times”

(Originally published in the Summer 2019 issue of The Insurance Receiver and is reprinted with the permission of IAIR)

A highly charged topic among insurance resolution practitioners is the obvious fact that insurance company failures are at an all-time low.  As a result, inevitable questions are raised about the resources—human and financial– committed to maintaining readiness for whatever insolvency activity may come along.

These conversations are not exclusive to the United States. NCIGF Vice Chair Chad Anderson of Western Guaranty Fund Services (WGFS) and I recently returned from a meeting in Taiwan with other resolution professionals from around the world. The resounding trend of these presentations? There is a lack of insurance company failures everywhere leading to some interesting outcomes for established guarantee mechanisms. For example:

  • Taiwan is spending their time changing their mission to become a risk management “think tank.”
  • Our neighbors in Canada do a series of research papers on why companies fail and are actively counseling regulators on ways to avoid liquidations.

Guarantee structures in some countries have never had an insolvency and others have only had a few. And with an emphasis on recovery of a troubled company in most of the rest of the world, it’s doubtful there will ever be a global spike in insurance insolvencies. In the United States, the decline in insurer failures requiring guaranty fund involvement can be traced to implementation of Risk Based Capital standards and the clearer picture this measurement to regulators of a company’s potential for peril.

That insurance insolvency is not a growth business is a win-win-win proposition. Regulators have sharpened tools like RBC to give consumers security in their insurance choices; the reputation of the competitive industry remains intact and carriers pay less in assessments allowing them to grow their business through investment and product development.

These are indisputably good outcomes but beg the question about the infrastructure in place to manage a dwindling volume of insurance insolvencies. Here are a few thoughts I’ve shared with the NCIGF board and our membership:

  1. Keep things in perspective. The property/casualty guaranty fund system is a bargain to stakeholders at around $70 million annually to operate. This is the cost of doing business to assure an effective safety net for insurance consumers. It’s not just my opinion; I often hear this point made by industry thought leaders. Besides, with 29 P/C guaranty associations already part of cost-sharing arrangements in their states, real efficiencies are already in place.
  1. Guaranty funds have plenty to do, even without new insolvencies. Claims are being managed every single day in guaranty fund offices across the country. Many these claims are worker compensation claims that are paid out at 100 percent over the claimant’s lifetime. Professional claims managers are actively involved in in assuring that those claimants are fully served, often making the difference in the life of that person and their family. Litigation Management, Data Security and other important tasks make for a busy daily existence in support of the insurance promise and policyholders.
  1. That there is a “resolution system” should remain the mantra of guaranty associations and insurance receivers. U.S. insurance regulation is seen as even more viable because there is a practiced and stable resolution mechanism. It’s also often forgotten that Title II of the Dodd-Frank Act expressly singles out the state-based insurance liquidation system as the designated forum for resolving an insurer failure of any size. We have no choice but to be ready.
  1. Maintaining a strong NCIGF is imperative. While not expressly statutory, NCIGF is mentioned over 40 times in the NAIC Handbook used by insurance receivers. An effective national coordinating entity is essential for numerous reasons, all vital but none more important than driving data management and security, now the highest priority in contemporary insurance resolutions. NCIGF also does the heavy lifting in relationships with industry, regulators (both nationally and internationally) and consumers. We provide trusted expertise to public policymakers who are not that familiar with how the safety net works.
  1. Recognition of the value the insurance industry derives from a statutory insurance resolution system is especially worthwhile when activity is subdued. Oddly, it’s the participants in the resolution mechanism itself that could do a better job acknowledging this linkage. And it’s not a tough sell. By protecting insurance policyholders, guaranty funds and insurance receivers uphold the insurance promise and provide a safety net that encourages the commercial enterprise of selling and buying insurance. The statutory resolution construct fills inevitable gaps in the larger insurance food supply chain. The system is built to work exactly this way. As a result, the insurance industry fully supports the GA system, even at times when we aren’t needed in great numbers on the front lines (like now).

NCIGF is always focused on providing operational support to our members and the entire resolution mechanism when the time comes. By looking at the big picture and addressing the right things in the right ways now, we can continue to present the P/C system as a dependable, flexible and durable consumer-protection mechanism fully capable of supporting the insurance promise as originally contemplated by policymakers and industry.

That’s why an impactful level of value-added non-insolvency engagement is not only warranted but necessary, regardless of the number of claims in the system. At NCIGF we call this “uncoupling claims from costs” and our Canadian colleague makes a presentation titled “In Times of Peace Prepare for War.” Taking a serious look at existing processes and challenging conventional wisdom is a wise and thoughtful course of action. To move these sentiments into pervasive thought will require candid, open discussions within NCIGF, regulators and the insurance industry.  We are regularly having those conversations.

Readiness for the nosier times is not negotiable. Being unprepared will draw attention and someone who knows much less about the purpose of the U.S. resolution mechanism will seek changes based on limited exposure to the realities of insurance resolution. Experienced insolvency practitioners will almost certainly be unhappy with that outcome. And anyway, if insolvency pros aren’t trying to do things better, then why are we here?

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