DEPARTMENT OF INSURANCE

Office of the Commissioner

FINAL

ORDER

304 Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition

Proposed amended Regulation 304 relating to Standards and Commissioner's Authority for Companies Deemed to be in Hazardous Financial Condition [Formerly Regulation 70] was published in the Delaware Register of Regulations on September 1, 2016. The comment period remained open until October 3, 2016. There was no public hearing on proposed amended Regulation 304. Public notice of the proposed amended Regulation 304 was published in the Register of Regulations in conformity with Delaware law.

SUMMARY OF THE EVIDENCE AND INFORMATION SUBMITTED

Comments were not received on the proposed amended Regulation 304. No changes were made to the proposed amended Regulation 304.

FINDINGS OF FACT

Based on Delaware law and the record in this docket, I make the following findings of fact:

1. 18 Del.C. §§311, 519, 520, 5901 and 5905 require a regulation to set forth rules and procedural requirements which the Commissioner deems necessary to carry out the provisions of the Code.

2. The requirements of proposed amended Regulation 304 best serve the interests of the public and of insurers and comply with Delaware law.

DECISION AND EFFECTIVE DATE

Based on the provisions of 18 Del.C. §§311, 519, 520, 5901 and 5905; and 29 Del.C. Ch. 101, and the record in this docket, I hereby adopt proposed amended Regulation 304 as may more fully and at large appear in the version attached hereto to be effective 10 days after being published as final.

TEXT AND CITATION

The text of proposed amended Regulation 304 last appeared in the Register of Regulations Vol. 20, Issue 3, pages 146-149.

IT IS SO ORDERED this 1st day of November, 2016.

Karen Weldin Stewart, CIR-ML

Insurance Commissioner

304 Define Standards and Commissioner’s Authority for Companies Deemed to be in Hazardous Financial Condition

This Regulation is adopted and promulgated by 18 Del.C. §§519, 520, 5901 and 5905 and 29 Del.C. Ch. 101.

2.1 The purpose of this Regulation is to set forth the standards which the Commissioner may use for identifying insurers found to be in such condition as to render the continuance of their business hazardous to the public, their creditors or to holders of their policies or certificates of insurance.

2.2 This Regulation shall not be interpreted to limit the powers granted the Commissioner by any laws or parts of laws of this state, nor shall this Regulation be interpreted to supersede any laws or parts of laws of this state.

3.1 The following standards, either singly or a combination of two or more, may be considered by the Commissioner to determine whether the continued operation of any insurer transacting an insurance business in this state might be deemed to be hazardous to the its policyholders, creditors or the general public. The Commissioner may consider:

3.1.1 findings of adverse financial condition or adverse market conduct examination reports adverse findings reported in financial condition and market conduct examination reports, audit reports, and actuarial opinions, reports or summaries;

3.1.2 the National Association of Insurance Commissioners Insurance Regulatory Information System and its related other financial analysis solvency tools and reports;

3.1.3 the ratios of commission expense, general insurance expense, policy benefits and reserve increases as to annual premium and net investment income which could lead to an impairment of capital and surplus whether the insurer has made adequate provision, according to presently accepted actuarial standards of practice, for the anticipated cash flows required by the contractual obligations and related expenses of the insurer, when considered in light of the assets held by the insurer with respect to such reserves and related actuarial items including, but not limited to, the investment earnings on such assets, and the considerations anticipated to be received and retained under such policies and contracts;

3.1.4 the insurer's asset portfolio when viewed in light of current economic conditions is not of sufficient value, liquidity, or diversity to assure the company's ability to meet its outstanding obligations as they mature;

3.1.5 the ability of an assuming reinsurer to perform and whether the insurer's reinsurance program provides sufficient protection for the company's insurer’s remaining surplus after taking into account the insurer's cash flow and the classes of business written as well as the financial condition of the assuming reinsurer;

3.1.65 whether the insurer's operating loss in the last twelve-month period or any shorter period of time, including but not limited to net capital gain or loss, change in non‑admitted assets, and cash dividends paid to shareholders, is greater than 50% of such insurer's remaining surplus as regards policyholders in excess of the minimum required;

3.1.6 whether the insurer’s operating loss in the last twelve-month period or any shorter period of time, excluding net capital gains, is greater than twenty percent (20%) of the insurer’s remaining surplus as regards policyholders in excess of the minimum required;

3.1.7 whether any affiliate, subsidiary or reinsurer is insolvent, threatened with insolvency, or delinquent in payment of its monetary or other obligation whether a reinsurer, obligor or any entity within the insurer’s insurance holding company system is insolvent, threatened with insolvency or delinquent in payment of its monetary or other obligations, and which in the opinion of the Commissioner may affect the solvency of the insurer;

3.1.8 contingent liabilities, pledges or guaranties which either individually or collectively involve a total amount which in the opinion of the Commissioner may affect the solvency of the insurer;

3.1.9 whether any "controlling person" of an insurer is delinquent in the transmitting to, or payment of, net premiums to such insurer;

3.1.10 the age and collectibility of receivables;

3.1.11 whether the management of an insurer, including officers, directors, or any other person who directly or indirectly controls the operation of such the insurer, fails to possess and demonstrate the competence, fitness and reputation deemed necessary to serve the insurer in such position;

3.1.12 whether management of an insurer has failed to respond to inquiries relative to the condition of the insurer or has furnished false and misleading information concerning an inquiry;

3.1.13 whether the insurer has failed to meet financial and holding company filing requirements in the absence of a reason satisfactory to the Commissioner;

3.1.134 whether management of an insurer either has filed any false or misleading sworn financial statement, or has released false or misleading financial statement to lending institutions or to the general public, or has made a false or misleading entry, or has omitted an entry of material amount in the books of the insurer;

3.1.145 whether the insurer has grown so rapidly and to such an extent that it lacks adequate financial and administrative capacity to meet its obligations in a timely manner; or

3.1.156 whether the company has experienced or will experience in the foreseeable future cash flow and/or liability problems.;

3.1.17 whether management has established reserves that do not comply with minimum standards established by state insurance laws, regulations, statutory accounting standards, sound actuarial principles and standards of practice;

3.1.18 whether management persistently engages in material under reserving that results in adverse development;

3.1.19 whether transactions among affiliates, subsidiaries or controlling persons for which the insurer receives assets or capital gains, or both, do not provide sufficient value, liquidity or diversity to assure the insurer’s ability to meet its outstanding obligations as they mature; or

3.1.20 any other finding determined by the Commissioner to be hazardous to the insurer’s policyholders, creditors or general public.

4.1 For the purposes of making a determination of an insurer's financial condition under this Regulation, the Commissioner may:

4.1.1 disregard any credit or amount receivable resulting from transactions with a reinsurer which is insolvent, impaired or otherwise subject to a delinquency proceeding;

4.1.2 make appropriate adjustments including disallowance to asset values attributable to investments in or transactions with parents, subsidiaries, or affiliates consistent with the NAIC Accounting Practices And Procedures Manual, state laws and regulations;

4.1.3 refuse to recognize the stated value of accounts receivable if the ability to collect receivables is highly speculative in view of the age of the account or the financial condition of the debtor; or

4.1.4 increase the insurer's liability in an amount equal to any contingent liability, pledge, or guarantee not otherwise included if there is a substantial risk that the insurer will be called upon to meet the obligation undertaken within the next 12‑month period.

4.2 If the Commissioner determines that the continued operation of the insurer licensed to transact business in this state may be hazardous to the policyholders, creditors or the general public, then the Commissioner may, upon his a determination, issue an order requiring the insurer to:

4.2.1 reduce the total amount of present and potential liability for policy benefits by reinsurance;

4.2.2 reduce, suspend or limit the volume of business being accepted or renewed;

4.2.3 reduce general insurance and commission expenses by specified methods;

4.2.4 increase the insurer's capital and surplus;

4.2.5 suspend or limit the declaration and payment of dividend by an insurer to its stockholders or to its policyholders;

4.2.6 file reports in a form acceptable to the Commissioner concerning the market value of an insurer's assets;

4.2.7 limit or withdraw from certain investments or discontinue certain investment practices to the extent the Commissioner deems necessary;

4.2.8 document the adequacy of premium rates in relation to the risks insured; or

4.2.9 file, in addition to regular annual statements, interim financial reports on the form adopted by the National Association of Insurance Commissioners or on in such format as promulgated by the Commissioner.;

4.2.10 correct corporate governance practice deficiencies, and adopt and utilize governance practices acceptable to the Commissioner;

4.2.11 provide a business plan to the Commissioner in order to continue to transact business in the State; or

4.2.12 notwithstanding any other provisions 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.

4.3 If the insurer is a foreign insurer, the Commissioner's order may be limited to the extent provided by statute.

4.4 Any insurer subject to an order under subsection 4.2 may request a hearing to review that order. The notice of hearing shall be served upon the insurer pursuant to the Delaware Administrative Procedures Act. The notice of hearing shall state the time and place of hearing, and the conduct, condition or ground upon which the Commissioner based the order. Unless mutually agreed between the Commissioner and the insurer, the hearing shall occur not less than 10 days nor more than 30 days after notice is served. The cCommissioner shall hold all hearings under this subsection privately, unless the insurer requests a public hearing, in which case the hearing shall be public.

Any order or decision of the cCommissioner shall be subject to review in accordance with the Administrative Procedures Act at the instance of nay party to the proceedings whose interests are substantially affected.

If any provisions of this Regulation be held invalid, the remainder shall not be affected.

This Regulation shall become effective thirty (30) days after the commissioner's signature 10 days after being published as final.