Florida Revises Insurer Solvency Review Process

By Michael Adams | May 4, 2014

The Florida legislature has approved legislation setting out new insurer solvency requirements while also requiring individuals to disclose information about any affiliated company.

Sponsored by Senator David Simmons (R-Altamonte Springs) and Representative Clay Ingram (R-Pensacola), the bill (SB 1308) closely follows a National Association of Insurance Commissioners (NAIC) model act developed after the 2008 financial crisis.

The bill touches on a number of areas with the goal of streamlining the regulatory oversight. It provides regulators with more information to determine an insurer’s overall financial status.

Florida Insurance Commissioner Kevin McCarty said the bill would help protect policyholders by ensuring that insurers are properly capitalized.

“Having a more complete picture of the entire enterprise will put us in a much better position to respond effectively to threats to the financial stability of insurance companies,” said McCarty.

Central to the bill is a provision that requires holding companies to disclose information about their operations. A holding company must annually provide a risk report to regulators. The report must contain detailed information about the firm’s business plan, developments in its risk management programs and any rating agency information.

Insurers also file annual reports with actuarial opinions on reserves and actuarial summaries.

The bill also sets out new reporting requirements related to individuals divesting their financial position in a company or investing in a company.

Among the changes are the revised definition of a controlling person as one having 10 percent of the ownership or interest in an insurer. Previously, an individual needed to have 25 percent ownership or interest of an insurer.

Lawmakers also sought to establish new guidelines for judging whether a life insurer is adequately capitalized and estimating an insurer’s reserves.

Critics charge that the current approach to estimating an insurer’s reserves is too conservative, fails to take into effect all risks given the complexity of life insurance products and does not reflect insurers’ business practice such as their use of derivatives.

Under the bill, state regulators would create a principle-based system that calls on life insurers to calculate not only their overall surplus, but also their surplus per line of business. Those surpluses are based on an insurer’s business model, the mortality rates of their policyholders and overall risk profile.

Proponents of the principle-based system say it will lower the prices for life insurance products, increase consumer choice and free up an insurer’s capital.

“Principle-based reserving will replace the current ‘one-size-fits-all’ formula to determine appropriate reserve levels that more closely reflects the risks associated with today’s highly complex insurance products,” said McCarty.

In 2013, seven states enacted similar principle–based legislation including Arizona, Indiana, Louisiana, Maine, New Hampshire, Rhode Island and Tennessee. Nine other states have signaled their plans to move to a principle-based system including Hawaii, Illinois, Iowa, Mississippi, Nebraska, New Mexico, Ohio, Oklahoma and Virginia.

Four other states in addition to Florida have legislation pending on the issue: Connecticut, Georgia, Missouri and West Virginia.

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