Solvency Surveillance: The Problem and a Solution

Abstract

This study investigates state insurance department examinations of insurance companies. It includes a detailed critique of the present system, with primary emphasis on its effectiveness, the frequency with which examinations are conducted, the personnel who conduct them, examination financing, procedures and reporting. association examination system is also described and evaluated. study reveals the present examination system to be deficient in every aspect. Many of the problems plaguing the present examination process can be alleviated by substituting annual independent audits for mandatory, full-scale, routine examinations of every insurer. Since the substitution cannot be complete, however, the states must retain authority to conduct examinations whenever they feel such action is in the best interest of policyholders. While insurance companies are regulated for many reasons, most scholars of insurance regulation maintain that insurer solvency should be the primary focus of insurance regulation. Edwin Wilhite Patterson, in his classic book Insurance Commissioner in the United States, indicates that protecting the public against financially unsound enterprises is the chief raison d' etre of the insurance commissioner.' maintenance of solvency, coupled with the goal of assuring reasonableness, fairness, and equity in the market, constitute what Professor Spencer Robert A. Zelten, Ph.D., is Assistant Professor of Insurance in the University of Pennsylvania. He has passed all of the examinations for the Certified Public Accountant designation. Dr. Zelten is editor of the Wharton Insurance Newsletter. This paper was submitted in October, 1971. 1 Edwin Wilhite Patterson, Insurance Commissioner in the United States (Cambridge: Harvard University Press, 1927), p. 192. argument that perhaps this is not the chief function of the commissioner in some circumstances (i.e., regulation of Blue Cross and Blue Shield) is defensible. See Robert D. Eilers, The Changing Environment for Blue Shield, Medical Care, Jan.-Feb., 1968, Vol. VI, No. 1, p. 67. Kimball calls the internal goals of insurance regulation.2 To achieve the internal goals of insurance regulation the insurance commissioner has been granted broad and important powers. Chief among these are his licensing power, power of judicial proceedings, rulemaking power, and the inquisitorial and visitorial powers. latter include both the right to require various reports from insurers and the authority to examine insurers. In their attempt to maintain the solidity of insuring enterprises, state legislatures and insurance regulators have introduced many provisions into the insurance laws. Minimum capital and surplus requirements, quantitative and qualitative investment regulations, conservative accounting requirements, the filing of extensive financial statements and periodic examinations are but a sampling of the regulations designed to guarantee the solvency of insurance companies. This paper 2 Spencer L. Kimball, The Goals of Insurance Law: Means Versus Ends, Journal of Risk and Insurance, Vol. XXIX. No. 1. March. 1962.