Insurance regulation in a nutshell

Section III.5.Annual Actuarial Opinion

Another core element of U.S. insurance solvency regulation is the actuarial opinion that must accompany the annual statement. The main liability of an insurer is the reserves it establishes for its insurance policy obligations. Here again is an instance where state insurance regulators rely on experts – a qualified actuary engaged by the U.S. insurer to verify the accuracy of reserves. The form and content of the actuarial opinion differs between life and property/casualty insurers.
A life insurer must include with its annual statement the statement of a qualified actuary, titled “Statement of Actuarial Opinion,” setting forth her opinion relating to policy reserves and other actuarial items. The opinion must include the life insurer’s general account and its separate accounts.
A property/casualty insurer must include with its annual statement the statement of a qualified actuary, titled “Statement of Actuarial Opinion,” setting forth her opinion relating to loss and loss adjustment expense reserves.

Section III.6.Risk-Based Capital

The NAIC Risk-Based Capital (RBC) For Insurers Model Act requires that each insurer prepare and submit to its domestic state insurance regulator, on or prior to each March 1, a report of its risk-based capital levels as of the prior December 31.¹⁶ The report must be in the form and contain the information required by the risk-based capital instructions, a set of instructions maintained and periodically revised by the NAIC.
The risk-based capital report reports the insurer’s “total adjusted capital” and its “authorized control level risk-based capital.” If the insurer’s total adjusted capital is less than its authorized control level risk-based capital and the insurer fails to respond to a corrective order, the state insurance regulator may (but is not required) to take action to cause the insurer to be placed in rehabilitation or liquidation.¹⁷
There are three other “risk-based capital” levels: (i) mandatory control level risk-based capital (measured at .7 times authorized control level risk-based capital), (ii) regulatory action level risk-based capital (measured at 1.5 times authorized control level risk-based capital), and (iii) company action level risk-based capital (measured at 2.0 times authorized control level risk-based capital).¹⁸ There are varying remedies that a state insurance regulator can and must take if the insurer’s total adjusted capital drops below each of these risk-based capital levels. All insurers seek to maintain total adjusted capital above the company action level risk-based capital level in order to avoid any kind of regulatory action.¹⁹ In a rare instance where state insurance laws take discretion away from the state insurance regulator, if an insurer’s total adjusted capital drops below the mandatory control level risk-based capital, the state insurance regulator is required to take action to cause the insurer to be placed into rehabilitation or liquidation if the event cannot be eliminated within 90 days.²⁰
While risk-based capital is intended to be confidential,²¹ an insurer’s total adjusted capital and authorized control level risk-based capital for each of the last 5 years are each reported in the insurer’s unaudited annual financial statement. The annual unaudited financial statement is generally subject to disclosure under state freedom of information laws. Thus, these numbers are made public.