806 KAR 3:150. Standards for insurers deemed to be in hazardous financial condition.

      RELATES TO: KRS 304.3-200, 304.33-140

      STATUTORY AUTHORITY: KRS 304.2-110

      NECESSITY, FUNCTION, AND CONFORMITY: KRS 304.2-110 provides that the Executive Director of Insurance may make reasonable administrative regulations necessary for or as an aid to the effectuation of any provision of the Kentucky Insurance Code. This administrative regulation establishes standards which the Executive Director of Insurance may use for identifying insurers found to be in such condition as to render the continuance of their business hazardous to policyholders, creditors, or the public.

      Section 1. Definitions. (1) “Executive Director" means the Commissioner of the Kentucky Office of Insurance; and

      (2) "Insurer" means any of the entities listed in KRS 304.33-020.

      Section 2. Standards. One (1) or more of the following standards may be considered by the executive director to determine whether the continued operation of any insurer transacting an insurance business in Kentucky may be deemed to be hazardous to policyholders, creditors, or to the general public:

      (1) Adverse findings reported in financial condition or market conduct examination reports;

      (2) The National Association of Insurance Commissioners Insurance Regulatory Information System and its related reports;

      (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;

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

      (5) The ability of an assuming reinsurer to perform and whether the insurer's reinsurance program provides sufficient protection for the 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;

      (6) Whether the insurer's operating loss in the last twelve (12) month period or any shorter period of time, such as net capital gain or loss, change in nonadmitted assets, or cash dividends paid to shareholders, is greater than fifty (50) percent of the insurer's remaining surplus as regards policyholders in excess of the minimum required;

      (7) Whether any affiliate, subsidiary, or reinsurer is insolvent, threatened with insolvency, or delinquent in payment of its monetary or other obligations;

      (8) Any contingent liabilities, pledges, or guaranties which either individually or collectively involve a total amount which in the opinion of the executive director may affect the solvency of the insurer;

      (9) Whether any controlling person of an insurer is delinquent in transmission or payment of net premiums to the insurer;

      (10) The age and collectability of receivables;

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

      (12) Whether management of an insurer has failed to respond to inquiries relative to the condition of the insurer or has furnished false or misleading information concerning an inquiry;

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

      (14) 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

      (15) Whether the insurer has experienced or will experience in the foreseeable future cash flow or liquidity problems.

      Section 3. Corrective Action. (1) For the purposes of making a determination of an insurer's financial condition under this administrative regulation, the executive director may:

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

      (b) Make appropriate adjustments to asset values attributable to investments in or transactions with parents, subsidiaries, or affiliates;

      (c) 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

      (d) 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 with the next twelve (12) month period.

      (2) If the executive director determines that the continued operation of the insurer in Kentucky may be hazardous to policyholders, creditors, or to the general public, the executive director may, upon his determination, issue an order requiring the insurer to:

      (a) Reduce the total amount of present and potential liability for policy benefits by reinsurance;

      (b) Reduce, suspend, or limit the volume of business being accepted or renewed;

      (c) Reduce general insurance and commission expenses by specified methods;

      (d) Increase the insurer's capital and surplus;

      (e) Suspend or limit the declaration and payment of dividends by an insurer to stockholders or policyholders;

      (f) File reports in a form acceptable to the executive director concerning the market value of the insurer's assets;

      (g) Limit or withdraw from certain investments or discontinue certain investment practices to the extent the executive director deems necessary;

      (h) Document the adequacy of premium rates in relation to the risks insured; or

      (i) File, in addition to regular annual statements, interim financial reports in the form of and pursuant to the instructions for the quarterly statements prescribed by the National Association of Insurance Commissioners (life and accident and health and fire and casualty, as revised in 1993, incorporated by reference and available for inspection and copying at the Kentucky Office of Insurance, 215 West Main Street, Frankfort, Kentucky 40601-2807, 8 a.m. - 4:30 p.m. (ET)), weekdays.

      (3) Any insurer subject to an order under subsection (2) of this section may request a hearing to review the order. The hearing, and judicial review thereof, shall be conducted as provided in KRS 304.2. (18 Ky.R. 239; Am. 700; eff. 9-6-91; 19 Ky.R. 2498; eff. 7-23-93; TAm eff. 8-9-2007.)