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Accessible version of tables contained within "A Comparison of the Insurance and Banking Regulatory Frameworks for Identifying and Supervising Companies in Weakened Financial Condition" (499 KB PDF)

Appendix A

Summary of State Regulation for Identifying and Supervising Financially Weakened Insurers

Regulatory Response
Phase1 Trigger Points Explanation Informal2 Formal3 Comments
1 Periodic (annual and quarterly) financial analysis of statutory financial statements Annual Statements are filed by March 1 of each year. Quarterly Statements are filed within 45 days following each quarter-end. The annual statement review process tends to be the more comprehensive of the two periodic reviews, because of the amount and depth of information provided by the statement. The analytical tools described in the cells below are utilized throughout the reviews. In addition, the state insurance department analyst also consider other factors/conditions such as a prolonged devaluation in the stock or real estate markets; reinsurance recoveries; deterioration of parent company's public debt rating; and class action lawsuits. Used in annual reviews, quarterly reviews and financial condition examination planning. Analysis results may lead to: 1) phone or e-mail inquiry; 2) letter requesting additional information; or 3) face-to-face meeting with management.
N/A
The NAIC Accreditation Program provides timelines by which analysis of domestic insurers should be completed by state insurance departments.
1 Scoring System The NAIC Scoring System ratios and scores provide an integrated approach to screening and analyzing the financial condition of insurers. Used in annual reviews, quarterly reviews and examination planning. Analysis results may lead to: 1) phone or e-mail inquiry; 2) letter requesting additional information; or 3) face-to-face meeting with management.   Ratios and scores are confidential. Ratios address critical areas of an insurer's operations, such as leverage of capital, growth, underwriting and investment profitability, investment holdings and liquidity. Companies receiving highest scores receive immediate attention, which often leads to a more in-depth analysis.
1 Analyst Team System (ATS) Review The NAIC ATS is a multi-tiered process through which insurers are assigned levels of priority by a team of state analysts/examiners. The system is based on a series of tests applied to an insurer's financial results, which then assigns a "level" ranking. If an insurer receives a ranking in the top two levels, the company is reviewed by a team member who then validates or changes the assigned level. Used in annual reviews and examination planning. Analysis results may lead to: 1) phone or e-mail inquiry; 2) letter requesting additional information; or 3) face-to-face meeting with management.   Like the Scoring System, the review process and results of the ATS are confidential. They are used by some states to gauge the financial soundness of non-domestic (foreign) insurers operating within the state.
1 Financial Condition Examination An on-site examination may detect existing or potential financial problems or may be used to investigate problems arising from routine financial analysis.   Required by state law; state insurance commissioner has absolute power to conduct examinations as appropriate; insurer must respond to examination report comments and recommendations. Examinations are conducted on either a full or limited-scope basis. Full-scope examinations are conducted every 3 - 5 years. Limited-scope examinations may be conducted more frequently, depending on circumstances.
1 Model Regulation Regarding Hazardous Financial Condition This model is a Standard in the NAIC Accreditation Program. The purpose of this regulation is to set forth standards, which the state insurance department may use for identifying insurers found to be in an unsound financial condition and for authority to initiate action. Standards considered and measured during analysis process; analysis results may lead to: 1) phone or e-mail inquiry; 2) letter requesting additional information; or 3) face-to-face meeting with management. These standards provide the basis for a court petition to rehabilitate or liquidate. All accredited states have passed laws substantially similar to the NAIC model. A state's rehabilitation and liquidation act may incorporate by reference its hazardous financial condition law.
1 Reinsurance Company Failure An insurer's reinsurance program is closely monitored by a state insurance department's staff and measured by various financial ratios. A significant rating downgrade or failure of any reinsurer triggers a reaction from department staff to identify affected insurers and to assess potential impact on the insurer's solvency. Analysis results may lead to: 1) phone or e-mail inquiry; 2) letter requesting additional information; or 3) face-to-face meeting with management. May result in limited-scope examination. Credit for reinsurance is heavily regulated through statutes, regulations, statutory accounting and reporting rules. These rules are part of the NAIC Accreditation Program.
1 Holding Company Filing All insurers are required to register certain information with their domiciliary regulator, if part of a holding company system. Information must be disclosed regarding transactions, relationships and agreements with parent, subsidiary and affiliate (PSA) entities, among other information. Analysis results may lead to: 1) phone or e-mail inquiry; 2) letter requesting additional information; or 3) face-to-face meetings with management. May result in limited-scope examination. Filings are required pursuant to NAIC Insurance Holding Company System Model Act. All accredited states have passed laws substantially similar to the NAIC model.
1 Market Conduct Finding All insurers periodically undergo some form of "market conduct" examination. As with financial condition examinations, these may be used to detect or investigate problems that impact existing as well as prospective policyholders. These examinations may also affect the insurer's financial stability.   State insurance commissioner has absolute power to conduct examinations as appropriate; insurer must respond to examination report comments and recommendations. The NAIC continues to work toward developing standards of practice for conducting market conduct examinations.
1 Actuarial Opinion All insurers are required to appoint "qualified actuary," as defined by the NAIC Annual Statement Instructions Property and Casualty (P&C), to provide an opinion on the adequacy of loss and loss adjustment expense reserves, if a P&C insurer; or policy reserves and other actuarially-determined reserves, if a life or health insurer. Opinion statements or a change in actuary may lead to: 1) phone or e-mail inquiry; 2) letter requesting additional information; or 3) face-to-face meeting with management.   To the extent possible and appropriate, examiners may utilize the work of the appointed actuary, to validate reserve adequacy.
1 Independent Audit Report (Report on Significant Deficiencies in Internal Controls) All insurers are required to obtain an opinion from an independent auditor on their annual financial statements. In addition, each insurer must submit a report prepared by the auditor describing significant deficiencies in the insurer's internal control structure identify during the annual audit. An insurer is also required to report a change in auditor to the insurance department of the state of domicile within five business days of the event. Report findings or a change in auditor may lead to: 1) phone or e-mail inquiry; 2) letter requesting additional information; or 3) face-to-face meeting with management. Associated with this filing are reporting requirements the independent, external auditor must fulfill if the insurer has materially misstated its financial condition. If internal control deficiencies are reported, the insurer must submit a remediation plan. To the extent possible and appropriate, examiners may utilize the work of the independent auditor, following some re-testing.
2 Business or Corrective Plan Closer monitoring requires obtaining the insurer's business plan or corrective plan (including financial projections), depending on the severity of the situation. Two to three year plans are often requested. Financial analyst/examiners utilize these plans to monitor management's execution of the plan and to stimulate dialogue. A business plan or corrective action plan may be required under general supervisory authority. In some instances, state law explicitly requires the insurer to file a business or corrective action plan. For example, if an insurer triggers a certain RBC action level, a Corrective Action Plan is required. Some state insurance departments are moving to routinely request business plans and financial projections from domestic insurers, particularly life insurers.
  Risk-Based Capital (RBC) There are five action levels, which are determined by comparing a company's Total Adjusted Capital (TAC) to its Authorized Control Level (ACL) RBC as computed by the RBC formula. TAC is compared to ACL RBC because the ACL RBC is the level at which a state insurance commissioner may first take control of an insurer - that is, control of the insurer may be seized.   RBC standards and actions are statutory requirements. The NAIC Risk-Based Capital for Insurers Model Act, or an act substantially similar, is required to attain state insurance department accreditation under the NAIC's Accreditation Program.
2 RBC Company Action Level TAC of 150% to 200% of minimum RBC constitutes a company action level under which an insurer must prepare a report to the state regulator outlining the corrective actions the company intends to take. At this level, an insurer must submit a comprehensive financial plan to the regulator that identifies the conditions contributing to the company's financial condition. This plan must contain proposals to correct the company's financial problems and provide projections of the company's financial condition, both with and without the proposed corrections. The plan also must list the key assumptions underlying the projections and identify the quality of, and the problems associated with, the insurer's business. If a company fails to file this comprehensive financial plan, this failure to respond triggers the next action level.   RBC standards and actions are statutory requirements.  
2 RBC Regulatory Action Level TAC of 100% to 150% of minimum RBC triggers a Regulatory Action Level initiative. At this level, an insurer is also required to file an action plan, and the state insurance commissioner is required to perform any examinations or analyses of the insurer's business and operations deemed necessary. The state insurance commissioner also issues appropriate corrective orders to address the company's financial problems.   RBC standards and actions are statutory requirements.  
3 RBC Authorized Control Level TAC of 70 to 100% of the minimum RBC triggers an Authorized Control Level. This is the first point that the law authorizes the regulator to take control of an insurer. This authorization is in addition to the remedies available at the company and regulatory action levels. It is important to note that the law grants the state insurance commissioner this power. This action level occurs at a point where the insurer may still be technically solvent according to traditional standards - that is, the company's assets may still be greater than its liabilities.   RBC standards and actions are statutory requirements.  
3 RBC Mandatory Control Level TAC of less than 70% triggers a Mandatory Control Level that requires the regulator to take steps to place an insurer under control. This situation can occur while the insurer still has a positive level of capital and surplus, although a number of the companies that trigger this action level are technically insolvent (liabilities exceed assets)   RBC standards and actions are statutory requirements.  
3 Administrative Supervision State insurance commissioner exercises varying levels of control over operations of an insurer, dependent upon the circumstances of the specific case. Ownership of company is not disturbed and directors remain in place. This phase usually involves submission of a corrective plan by the insurer. The state insurance commissioner may appoint an on-site supervisor to monitor performance.   Statutory requirements relating to administrative supervision vary by state.  
4 Receivership State insurance commissioner obtains a court order authorizing 1) seizure of a company; 2) appointment of the state insurance commissioner as receiver; and 3) vesting legal title to all assets of the company in the state insurance commissioner's name. Management and directors are removed. As receiver, the state insurance commissioner's actions are subject to supervision by the state court that issued the receivership order. State insurance commissioner typically appoints a special deputy receiver to manage the receivership. Receiver may attempt to rehabilitate the insurer or, if rehabilitation is not practical, the receiver will liquidate the company.   Statutory requirements relating to receivership vary by state. Initial seizure order may be obtained ex parte in some situations. State insurance commissioner has broad discretion in administering the receivership.
  1. The term, �phase� in this table is used to refer to possible levels of progression relating to supervisory action as outlined in the NAIC Troubled Company Handbook.  Return to text
  2. Powers confirmed by discretionary authority of a commissioner or department of insurance.  Return to text
  3. Powers permissible by state statute or regulation.  Return to text


Appendix B

Summary of Federal Reserve System Framework for Identifying and Supervising Financially Weakened State Member Banks and Bank Holding Companies

This table highlights key elements of the FRS's supervisory framework pertaining to bank holding companies (BHCs) and state member banks. It does not purport to include all events that may trigger a supervisory response or the full range of applicable supervisory actions.

Event That May Trigger Supervisory Response Applicable Regulation/ Policy or Guidance1 Supervisory Action and Time Frames for Action if Applicable
  1. Quarterly surveillance results for state member banks
SR letter 00-7: System Bank Watch List Program Reserve Bank staff investigates potential financial weaknesses and prepares or updates analyses for watch list banks identified through the FRS's quarterly surveillance process. The analyses address the sources of potential weakness and their potential effect on safety and soundness; assess the appropriateness of current supervisory ratings and on-site examination schedules; and detail future supervisory plans.
  1. Quarterly surveillance results for BHCs

SR letter 95-43: Revised Bank Holding Company Surveillance Procedures

SR letter 02-01: Revisions to BHC Supervision Procedures for Organizations with Total Consolidated Assets of $5 Billion or Less (Contains separate guidance for both BHCs $1 - $5 billion, and BHCs less than $1 billion in assets.)

Reserve Bank staff prepares or updates analyses for BHCs with assets of $1 billion or more identified by quarterly exception screens. The Reserve Bank analyses detail the sources of potential weakness, their effect on safety and soundness, and supervisory actions in response to surveillance screen results. For BHCs under $1 billion, (except small, non-complex BHCs), quarterly surveillance screens are also used to identify potentially significant changes in the conditions of these companies between on-site supervisory reviews.
  1. Risk assessments of BHCs, including FHCs, and banks are prepared by Federal Reserve Bank staff. Risk assessments include an analysis of the level of risk, the direction of risk, and management controls. The following risks are assessed for the consolidated organization, as well as for the major business lines: operational risk, credit risk, market risk, liquidity risk, legal risk, reputational risk, and overall risk. For FHCs, particular focus is on understanding intra-group exposures and risk concentrations across all business lines.

SR letter 97-24: Risk-Focused Framework for the Supervision of Large Complex Institutions

SR letter 97-25: Risk-Focused Framework for the Supervision of Community Banks

SR letter 99-15: Risk-Focused Supervision of Large Complex Banking Organizations

SR letter 02-01: Revisions to BHC Supervision Procedures for Organizations with Total Consolidated Assets of $5 Billion or Less

SR letter 00-15: Risk-Focused Supervision Policy for Small Shell BHCs

SR letter 00-13: Framework for Financial Holding Company Supervision

Based on the risk assessment, supervisory staff determines the scope, objectives and dates for targeted on-site reviews of selected risk areas.

Supervisory staff coordinates with functional and primary regulators when appropriate.

  1. Significant market, economic or other external event affecting banking industry condition
FRS's role to maintain stability of the banking system as well as role of prudential regulator for banking institutions. Conduct monitoring and targeted reviews of banking organizations, as appropriate, and develop action plans.
  1. Bank examinations and BHC inspections

Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) requires full-scope on-site examinations of state member banks are required at least once during each 12-month period with the exception that certain small institutions can be examined once during each 18-month period.

The frequency of BHC inspections is dependent on the size, condition, and complexity of the institution.

Institutions are required to respond to issues identified. A range of informal and formal supervisory actions that may be appropriate to address weaknesses identified include but are not limited to:
  • Written Agreement,
  • Cease and Desist Order,
  • Temporary Cease and Desist Order, and
  • Prompt Corrective Action (PCA) (see below portion of this chart regarding PCA).
  1. FHCs whose depository institution subsidiaries become less than well capitalized or are not well managed
Formal corrective action is required under section 4(m) of the BHC Act
  • Requires an agreement between the FHC and the FRS within 45 days of notification of deficiency.
  • Institution must submit a plan for corrective action.
  • Institution must correct deficiency within 180 days; FRS may extend the deadline based on reasonable cause.
  1. Capital deterioration – Bank capital deterioration:
FDICIA PCA provisions apply to bank capital levels. These provisions do not apply to BHC capital levels.  
Well capitalized
  No action required
Adequately capitalized
  No action required
Undercapitalized
FDICIA PCA provisions apply to bank capital levels. These provisions do not apply to BHC capital levels. Increase monitoring. The following conditions apply:
  • Capital restoration plan is required;
  • Parent BHC must guaranty bank's capital plan;
  • Cessation of dividends; and
  • Limitation on management fees paid to controlling persons.
Significantly undercapitalized
FDICIA PCA provisions apply to bank capital levels. These provisions do not apply to BHC capital levels. Conditions (see above) for "Undercapitalized" banks apply.
  • Mandatory and discretionary restrictions include:
  • Sale of shares to increase capital;
  • Sale or merger of bank;
  • Restrictions on transactions with affiliates;
  • Restrictions on interest rates; and
  • Restrictions on senior officer compensation.
Critically undercapitalized
FDICIA PCA provisions apply to bank capital levels. These provisions do not apply to BHC capital levels. Conditions (see above) for "Undercapitalized" and "Significantly Undercapitalized" banks apply. The Federal Deposit Insurance Corporation (FDIC) may be appointed receiver within 90 days.
BHC capital deterioration
BHC Act BHC capital deterioration may trigger informal or formal action such a Memorandum of Understanding, Written Agreement, or Cease and Desist Order.
  1. Bank & BHC insolvency
   
Bank insolvency or other factors identified by the chartering agency (state banking department or OCC) that are likely to result in losses to the federal deposit insurance fund
Federal Deposit Insurance Act FDIC is generally appointed receiver.
BHC insolvencies
N/A: BHC insolvencies fall under federal bankruptcy laws.
N/A
  1. SR letters, the Commercial Bank Examination Manual, and the Bank Holding Company Inspection Manual provide guidance to Federal Reserve Banks for implementing their Federal Reserve Board-delegated responsibility for the supervision of banking organizations. SR letters are issued by Federal Reserve Board staff to the officers in charge of supervision at each Reserve Bank. These documents are accessible on the Federal Reserve Board's website at www.federalreserve.gov.  Return to text