Effective January 1, 2014, the California Department of Insurance has added six new regulations to Title 10 of the California Code of Regulations. These can be found at Title 10, Chapter 5, Article 22 Sections 2598 through 2598.6. The purpose of the new regulations is to provide the Insurance Commissioner with a number of tools to be used in determining whether an insurer is in such financial condition that continuance of its business may be hazardous to policyholders, creditors, or the general public and the steps to be used if such a finding is made.
Section 2598.2 sets out the standards to be used by the Commissioner in determining whether
“. . . the continued operation of any insurer transacting an insurance business in this state might be deemed to be hazardous to its policyholders, creditors or the general public.
While there are 20 “standards,” the main ones are:
- Whether the insurer has made adequate provision for its anticipated cash flow needs;
- Whether the insurer’s operating loss exceeds 50% of its “surplus as regards policyholders in excess of the minimum required”;
- Whether the insurer’s operating loss, excluding net capital gains exceeds 20% of its “surplus as regards policyholders in excess of the minimum required”;
- If, “in the opinion of the Commissioner” the solvency of the insurer is threatened by the insolvency of a reinsurer, obligor or any entity within the insurer’s holding company system;
- Contingent liabilities, pledges or guarantees either individually or collectively, “in the opinion of the Commissioner” may affect the solvency of the insurer;
- If any member of management “fails to possess and demonstrate the competence, fitness and reputation deemed necessary to serve the insurer in such position”;
- Whether the insurer has grown too fast and “lacks adequate financial and administrative capacity to meet its obligations in a timely manner”;
- Whether management consistently under reserves resulting in adverse development; and
- “Any other finding determined by the commissioner to be hazardous to the insurer’s policyholders, creditors or general public.”
Once the commissioner determines that there is a hazardous financial condition, the regulation provides that the commissioner can implement a number of corrective actions which are listed. However, the last corrective action basically allows the commissioner to do whatever is believed to be necessary concerning the adjustment of premiums:
Notwithstanding any other provision of law limiting the frequency or amount of premium rate adjustments, adjust rates for any non-life insurance product written by the insurer that the commissioner considers necessary to improve the financial condition of the insurer.