Section R20-6-308. Determination of Insurer’s Hazardous Financial Condition

A.      The Director shall consider the following criteria, either singly or in combination, to determine whether any insurer is in such condition as to render the continuance of its business hazard- ous to its policyholders or the people of this state:

1.        Whether any financial or market conduct examination reports, audited financial reports or the insurer’s financial statement filings contain any adverse findings or informa- tion with respect to its financial condition;

2.        Whether any reports or information received from the National Association of Insurance Commissioners’ Insur-

ance Regulatory Information System are adverse to the insurer with respect to its financial condition;

3.        Whether the ratios of commission expense, general insur- ance expense, policy benefits and reserve increases to annual premium and net investment income are adequate in relation to the insurer’s capital and surplus;

4.        Whether premium income is adequate in relation to capi- tal and surplus;

5.        Whether the insurer’s assets are of sufficient fair market value, liquidity, and diversity to assure its ability to meet its outstanding obligations as they mature;

6.        Whether the insurer’s reinsurance provides adequate pro- tection 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;

7.        Whether the insurer’s operating loss in the last 12-month period or any shorter period of time, including but not limited to net capital gain or loss, change in non-admitted assets, and cash dividends paid to shareholders, is greater than 50% of such insurer’s remaining surplus as regards policyholders that is in excess of the minimum required;

8.        Whether asset values are attributable to investments in or transactions with parents, subsidiaries, or affiliates;

9.        Whether any affiliate, subsidiary or reinsurer of the insurer is impaired, unable to meet its obligations as they come due, or in a condition that would render the contin- uance of its business hazardous to the insurer’s policy- holders or the people of this state;

10.     Whether contingent liabilities, pledges or guaranties of the insurer, either individually or collectively, total an amount which equals or exceeds the insurer’s net worth so as to jeopardize its solvency;

11.     Whether there is a substantial risk that the insurer will be called upon to meet its obligations under any contingent liability, pledge or guaranty;

12.     Whether any “controlling person” of an insurer as defined in A.R.S. § 20-481(3) is delinquent in transmitting net premiums to such insurer;

13.     Whether receivables are of doubtful collectibility;

14.     Whether all persons possessing, directly or indirectly, the power to cause the direction of the management and poli- cies of the insurer, whether as the result of an official position or corporate office held by the person or through “control” as defined in A.R.S. § 20-481(3), are ade- quately competent, experienced and of good character to exercise such power;

15.     Whether an insurer has failed to fully respond to inquiries relative to the financial condition of the insurer or has fur- nished false or misleading information concerning such an inquiry;

16.     Whether an insurer has filed any  false  or misleading sworn financial statement, or has made a false or mislead- ing entry in its financial records, or has omitted any entry from its financial records necessary to make such records truthful and accurate, or has made any misrepresentation to lending institutions or to the general public regarding its affiliations;

17.     Whether the insurer lacks adequate financial and admin- istrative capacity to meet its obligations in a timely man- ner considering its growth;

18.     Whether the company has experienced cash flow or liquidity problems.

B.       For the purpose of determining an insurer’s financial condition under this rule, the Director may disregard or adjust the value

of assets or increase liabilities based upon consideration of the criteria set forth in subsection (A).

C.      If the Director determines that any insurer is in such condition as to render the continuance of its business hazardous to its policyholders or the people of this state, then, in addition to any other action authorized by A.R.S. Title 20, the Director may issue an order requiring the insurer to:

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

2.        Reduce, suspend or limit the volume of insurance risk being accepted or renewed;

3.        Reduce its general insurance and commission expenses by specified methods;

4.        Increase its capital and surplus;

5.        Suspend or limit principal or interest payments on surplus notes or the declaration and payment of dividends to its stockholders or to its policyholders;

6.        File reports concerning the fair market value of its assets in accordance with A.R.S. § 20-235(C);

7.        Limit or withdraw from certain investments or discon- tinue certain investment practices;

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

9.        File, in addition to regular annual statements, interim financial reports in accordance with A.R.S. § 20-235(C).

D.      A hearing demanded by an insurer aggrieved by an order of the Director under subsection (C) shall be closed to the public, but the hearing shall be open to the public if so requested in accordance with A.R.S. § 20-164(A).

E.       This rule shall not be interpreted to limit or supersede any pro- vision of A.R.S. Title 20 or any other provision of law pertain- ing to the powers of the Director or the regulation of the financial condition of insurers transacting insurance in this state.

Historical Note

Adopted effective March 22, 1993 (Supp. 93-1). R20-6-

308 recodified from R4-14-308 (Supp. 95-1).