Question

1. Ashley is an actuary who is employed by the Nebraska Department of Insurance. Her duties include monitoring the financial position of insurance companies doing business in Nebraska. Based on an analysis of annual financial statements that insurers are required to submit, she discovered that Mutual Life Insurance has a risk-based capital ratio of 75 percent. Based on this information, answer the following questions: a. (3 points) What is the purpose of requiring insurers to meet risk-based capital requirements? b. (3 points) What regulatory action, if any, should the Nebraska Department of Insurance take with respect to Mutual Life Insurance? c. (4 points) Would your answer to b. change if the risk-based capital ratio for Mutual Life Insurance fell to 30 percent? Explain your answer. d. (4 points) Mutual Life Insurance has 25 percent of its assets invested in common stocks. Assume the stocks are sold, and the proceeds are invested in U.S. government bonds. What effect, if any, will this investment change have on the risk-based capital ratio of Mutual Life Insurance? Explain your answer 2. (10 points) Review the historical origins and development of state insurance regulation. 3. Opal, age 75, has a $60,000 ordinary life insurance policy that has a cash value of $35,000. Opal is concerned about the cost of long-term care in a nursing home. A new agent of a national life insurer persuaded her to transfer the $35,000 into a deferred annuity. The agent told Opal that the annuity pays lifetime income benefits and also allows her to withdraw the $35,000 without penalty if she should enter a nursing home. After the policy was issued, Opal had 10 days to change her mind. During the free-look period, a friend of Opal examined the policy. Analysis of the policy showed that: - Only 10 percent of the cash value could be withdrawn each year without penalty - A 7 percent surrender charge would apply to any excess amounts withdrawn - The income payments were scheduled to start in 10 years when Opal attained age 85 As a result, Opal filed a complaint against the agent with the state insurance department. An investigation revealed that the agent had made similar misrepresentations to other clients. a. (3 points) Based on the above facts, identify the illegal practice in which the agent engaged. b. (3 points) What action can the state insurance department take against the dishonest agent? c. (3 points) What action can the state insurance department take against the life insurer? 4. Although domiciled in Nebraska, Auto Insurance Company is licensed to sell auto insurance in 10 states. A different set of rates applies in each state. In five states, prior approval of rates is required. Two states have a file-and-use law, and the remaining three states have a flex-rating law. Auto Insurance Company has experienced poor underwriting results and needs to increase its rates. a. (3 points) Explain how each of the above rating laws would apply to Auto Insurance Company. b. (4 points) Describe some possible problems that Auto Insurance Company may experience in trying to get its rates increased in a prior-approval state. 5. (10 points) Explain the role of the National Association of Insurance Commissioners in coordinating and serving state insurance regulators.

Answer 1

Only first 3 sub parts will be answered. Please post separate question

a. The risk-based capital requirements establishes the minimum capital requirements to be held by financial institutions, in aim to reduce the risk of insolvency. Insurers are monitored by how much capital they have in relative to their risk based capital requirements. This is to ensure the insurers have enough capital at hand to settle any unpredictable increase in claims or when the company is incurring losses.

b. RBC at 75% ratio would fall under authorized control level, where the regulator is authorized to take control of the insurer.

c. RBC at 30% ratio categorize the action level to mandatory control levels, where the regulator is required to take steps to place the insurer under control.