DEPARTMENT OF REGULATORY AGENCIES

Division of Insurance

3 CCR 702-3

Financial Issues

Amended Regulation 3-1-7

REGULATION TO DEFINE STANDARDS AND COMMISSIONER’S AUTHORITY FOR COMPANIES DEEMED TO BE IN HAZARDOUS FINANCIAL CONDITION

Section 1Authority

Section 2Scope and Purpose

Section 3Applicability

Section 4Conditions of Review

Section 5Commissioner's Options

Section 6Severability

Section 7Enforcement

Section 8Effective Date

Section 9History

Section 1Authority

This regulation is promulgated under the authority of §§ 10-1-109,10-3-201(1)(b),10-6-129, 10-14-505, and 10-16-109, Colorado Revised Statutes (C.R.S.).

Section 2Scope and Purpose

The purpose of this regulation is to set forth certain items and conditions which are routinely considered by the Commissioner of Insurance (Commissioner) in reviewing insurers' financial filings. These filings are reviewed to determine continued compliance with Colorado laws and to determine if a delinquency, as defined by § 10-3-402(2), C.R.S., exists. This review focuses on the financial aspects of an insurer and is used to determine if it is operating in such a manner as to render the continuation of its business hazardous to the public or to holders of its policies or certificates of insurance. If a determination of delinquency is made, this regulation describes some of the options available to the insurer and the Commissioner to be considered in abating the condition.

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.

Section 3Applicability

This regulation shall apply to all Colorado licensed insurers as well as to each Colorado licensed group captive insurer, fraternal benefit society, health maintenance organization, prepaid dental care plan organization, and non-profit hospital, medical-surgical and health service corporation.

Section 4Conditions of Review

The following conditions are routinely considered by the Commissioner during the review of financial filings and, either one or more, may cause a determination that the continued operation of the company in this state is considered to be hazardous to the policyholders or the general public. As used within this regulation, a hazardous financial condition means that the company is either currently impaired, insolvent or unable to honor its obligations when due; or a condition or pattern exists which may reasonably be expected to cause the company to be impaired, insolvent or unable to honor its obligations when due in the future. In conducting this review, the Commissioner may consider, but is not limited to, the following:

A.Adverse findings reported in financial condition and market conduct examination reports;

B.Information produced by the National Association of Insurance Commissioners Insurance Regulatory Information System;

C.A ratio of commission expense, general insurance expense, policy benefits and reserve increases to annual premium and net investment income which could lead to an impairment of capital and surplus;

D.An asset portfolio which, 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;

E.The ability of an assuming reinsurer to perform and whether the company's reinsurance program provides sufficient protection for the company's remaining surplus after taking into account the company's cash flow and the classes of business written;

F.The company'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), or its change in non-admitted assets, or its cash dividends paid to shareholders, is greater than 50% of such company's remaining surplus as regards policyholders in excess of the company action level risk based capital;

G.Whether a parent or any affiliate, subsidiary or reinsurer is insolvent, threatened with insolvency, or delinquent in payment of its monetary or other obligations;

H.Contingent liabilities, pledges or guarantees which, either individually or collectively, involve a total amount which in the opinion of the Commissioner may affect the solvency of the company;

I.Whether any controlling person of a company is delinquent in transmitting to, or payment of, net premiums or other amounts to such company;

J.The age and collectability of receivables;

K.Whether the management of a company, including officers, directors, or any other person who directly or indirectly controls the operation of such company, fails to possess and demonstrate the competence, fitness and reputation deemed necessary to serve the company in such position;

L.Whether management of a company has failed to respond to inquiries relative to the condition of the company or has furnished false and misleading information concerning an inquiry;

M.Whether management of a company either has filed any false or misleading financial statement, or has released a 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 company;

N.Whether the company 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;

O.Whether the company has experienced or will experience in the foreseeable future cash flow and/or liquidity problems;

P.Whether the company has sufficient surplus to continue to write the type of coverages currently offered or contemplated. In making this determination, the Commissioner may require an opinion by an actuary which addresses whether or not the current surplus is sufficient for the current and anticipated writings of the company. Any opinion must be accompanied by the underlying report supporting such opinion and shall consider exposure, timing on anticipated asset and liability streams and any other consideration deemed necessary by the actuary; or

Q.Whether the total adjusted capital is less than 200% of the authorized control level for the most recent RBC calculation.

Section 5Commissioner's Options

A.For the purposes of making a determination of a company's financial condition under this regulation, the Commissioner may, among other things:

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

2.Make appropriate adjustments to asset values attributable to investments in or transactions with parents, subsidiaries, or affiliates;

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;

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

5.Direct the company to submit additional information which may assist the Commissioner in reaching a determination. These include, but are not limited to, actuarial analysis, cash flow testing, asset/liability matching, feasibility analysis, surplus adequacy analysis and portfolio diversification analysis.

B.If the Commissioner determines that a delinquency exists due to a specific practice or act of the company, or that the continued operation of the company may be hazardous to the policyholders or the general public, the Commissioner may furnish the company with a written explanation of the delinquency, request additional information, if necessary, to conclude the investigation or determination and request the position of the company with regard to such findings. The Commissioner may provide a written list of requirements for the company to abate the situation. Alternatively, the company may offer a plan of abatement for review and approval by the Commissioner. Examples of corrective measures or monitoring which the Commissioner may require in a plan of abatement include, but are not limited to:

1.Reducing the total amount of present and potential liability for policy benefits by reinsurance;

2.Reducing, suspending or limiting the volume of business being accepted or renewed;

3.Reducing general insurance and commission expenses by specified methods;

4.Increasing the company's capital and surplus;

5.Suspending or limiting the declaration and payment of dividends by a company to its stockholders or to its policyholders;

6.Filing reports in a form acceptable to the Commissioner concerning the market value of a company's assets;

7.Limiting or withdrawing from certain investments or discontinuing certain investment practices to the extent the Commissioner deems necessary;

8.Documenting the adequacy of premium rates in relation to the risks insured;

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

10.Establishing a special deposit for Colorado policyholders;

11.Ceasing or desisting from certain practices or acts which have contributed to or caused the delinquency; or

12.Filing actuarial feasibility studies, projections, cash flow analyses or asset/liability matching analyses with assumptions and/or scenarios acceptable to the Commissioner.

Section 6Severability

If any provision of this regulation or the application of it to any person or circumstance is for any reason held to be invalid, the remainder of this regulation shall not be affected.

Section 7Enforcement

Noncompliance with this regulation may result in the imposition of any of the sanctions made available in the Colorado statutes pertaining to the business of insurance, or other laws, which include the imposition of civil penalties, issuance of cease and desist orders, and/or suspensions or revocation of license, subject to the requirements of due process.

Section 8Effective Date

This amended regulation shall become effective December 1, 2012.

Section 9History

Amended, Effective October 1, 1992.

Amended, Effective April 1, 2001.

Amended, Effective December 1, 2012.

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