Last Updated 5/31/2023

One of the primary objectives of insurance regulators is to identify, as early as possible, insurance companies that are showing signs of becoming financially troubled so corrective action can be taken to protect policyholders, claimants, and creditors from financial loss. 

A troubled insurance company is generally defined as a company that either is in or is moving toward a financial position that subjects its policyholders, claimants, and other creditors to greater-than-normal financial risk, including the possibility the company may not maintain compliance with the applicable statutory capital and/or surplus requirements. 

The opportunity and ability to save a troubled insurance company from insolvency and liquidation, and thereby minimize any loss to policyholders and creditors, generally diminishes the longer a troubled company continues to operate in an adverse financial condition. Therefore, special procedures should be designed and implemented by insurance regulators to identify potential troubled companies in an early stage. 

State insurance departments routinely perform a variety of functions to monitor the financial condition of insurance companies. Such monitoring activities would ordinarily include the collection and analysis of annual and quarterly financial information, desk audits of financial information, SEC filings and other holding company filings, the collection and review of information in connection with the licensing or admission of companies, and review of Risk-Based Capital (RBC) reports. At times, the gathering and analysis of financial information, by itself, may not be sufficient to identify a troubled company situation. The analysis of the operational aspects of the company (e.g., market conduct) should also be considered. 

Operational and financial conditions need to be considered together with other corroborative information to reach a conclusion as to whether an insurance company is troubled. The additional information to corroborate these findings might be obtained through communications with other insurance departments or through requests for additional information from the company. 

The NAIC Financial Analysis Working Group (FAWG) offers a layer of peer review for each regulator's solvency monitoring efforts, thus ensuring that experienced state regulator colleagues improve and enhance state regulator judgments regarding a company's financial condition. FAWG ensures state insurance financial regulators share information and ideas in their work to identify and monitor potentially troubled insurers. With its regular meetings, FAWG provides an efficient means of facilitating and increasing communication between the state of domicile of the troubled company and other interested state regulators. 

When state regulators identify a troubled company, they must decide on the most appropriate courses of action. Regulators should be prepared to act quickly, if necessary, to stabilize a troubled situation and to prevent further deterioration. Preliminary actions may include instituting controls over operations or transactions, including access to and use of the company's assets. Most state insurance departments have adopted the NAIC's Risk-Based Capital for Insurers Model Act which requires specific action on the part of the company, the department, or both, when a company's RBC ratio falls below specified levels. 

Among corrective actions that may be undertaken by regulators are: taking control of the company's assets (monitor the sale or purchase of assets), changing the company's management, changing the company's operations, raising new capital, entering into reinsurance transactions, changing the mix of the company's asset portfolio, merging with a financially sound insurance company, and selling certain assets. 

The insurance department may determine that the company situation cannot be corrected, or the corrective plan cannot be completed successfully. In those circumstances, state regulators may determine the appropriate course of action is to place the troubled company in receivership.