Regulatory Tests in the Life and Health Insurance Industry

Abstract

The Regulatory Tests in the Life and Health Insurance Industry have evolved from a very detailed set of twenty-nine diagnostic sets to the present (1974) early warning system of nine regulatory tests primarily to provide for wider use of the tests by the various state insurance departments, the majority of such departments not having the necessary staff for the detailed analysis required by the large set of tests. None of these tests has ever measured directly the solvency of insurers. The tests are designed to indicate those insurers most in need of further and more detailed analysis. The present (1974) form of the National Association of Insurance Commissioners (NAIC) Life and Health Insurance Company Regulatory Tests appears markedly different from that shown for 1972. The concept of such tests has changed from a detailed set of twenty-nine diagnostic tests to only nine tests designed for the preliminary determination of insurers to be investigated more thoroughly.* The 1972 Tests were developed, largely through research conducted by the Illinois Insurance Department, as a system through which a knowledgeable and well trained staff could interpret and diagnose the strengths and weaknesses of each insurer. A number of other state insurance departments already had developed sets of tests for these purposes. A wide difference of opinion prevailed among these states as to which tests were significant. When the specifications for the 1972 NAIC Tests were announced, the states with smaller and less well trained staffs were overwhelmed. No practical way could be found in which the proposed twenty-nine tests John 0. Montgomery, F.S.A. and F.L.M.I., is Deputy Insurance Commissioner and Chief Actuary in the State of California Insurance Department. Currently he is chairman of two NAIC Task Forces (A3 and Cl) and of NAIC Technical subcommittee on Valuation and Nonforfeiture Value Regulation (C3). He was responsible for the determination of proof of alleged computer fraud with respect to the investigation of the Equity Funding Life Insurance Company. Previous to his present employment, he served the Occidental Life Insurance Company in various autuarial capacities. This paper was delivered at the 1975 Annual Meeting of ARIA. * These tests are impossible to discuss without using phrases from the NAIC publication "Using the Early Warning System For Life and Health Insurers". Gratitude is expressed for permission by the NAIC to refer to portions of that text and previous materials appearing in various published proceedings of the NAIC. The comments and suggestions by members of the NAIC (A3) Life and Health Insurance Regulatory Test Task Force and its Advisory Committee, as well as the work of the actuarial staff of the California Insurance Department, are also gratefully acknowledged.