Insurance Regulatory Compliance: Managing Risk Across All 50 States

An insurance company that sells products across multiple states must maintain a separate license in each state, satisfy each state's domestic solvency and investment requirements, and file its rates and forms with each state's department of insurance, and insurance transactions and regulatory counsel advising on a multi-state licensing program must evaluate whether the company's product designs comply with the specific statutory and regulatory requirements of each target state and whether any of the company's proposed marketing practices raise regulatory concerns that should be identified and addressed before launch.

The NAIC develops model laws and regulations that each state then adopts, modifies, or declines to adopt through its own legislative and regulatory process, creating a patchwork of requirements that companies can analyze to identify the states that offer the most favorable regulatory environment, and insurance advisory counsel advising on a regulatory arbitrage strategy must evaluate whether the company's chosen domicile state offers investment flexibility, surplus requirements, and product approval processes that are more favorable than those available in other potential domicile states and whether the domicile state's insurance department has a reputation for working constructively with companies through the product approval process.

An insurance company whose risk-based capital ratio falls into the regulatory action levels established by NAIC standards faces mandatory regulatory intervention that can range from requiring a corrective action plan to placing the company in rehabilitation or liquidation, and insurance law counsel advising on risk-based capital management must evaluate whether the company's asset portfolio is optimized to minimize the risk charges applied under the applicable RBC formula and whether any anticipated changes in the company's business plan or investment strategy will affect its RBC ratio.

A domestic insurance company's financial statements filed with its state insurance department must comply with statutory accounting principles rather than GAAP, and the differences between SAP and GAAP materially affect the company's reported surplus, its ability to pay dividends to its parent, and its compliance with minimum surplus requirements, and administrative law counsel advising on statutory accounting must evaluate whether the company's proposed accounting treatments for significant transactions are consistent with the statutory accounting guidance applicable in its domicile state and whether any planned dividend payments are within the limits permitted without regulatory approval.

A state insurance department's market conduct examination team has broad authority to review an insurance company's underwriting, rating, claims handling, and policyholder service practices, and a company that fails to cooperate effectively risks a consent order or substantial fine, and insurance regulatory counsel advising on a market conduct examination must evaluate whether the company's document production complies with the examination team's requests while protecting materials covered by the attorney-client privilege and whether any practices the examination team has identified as problematic can be defended as consistent with the applicable regulatory requirements.

An insurance company that denies or delays payment of a claim may face a lawsuit alleging bad faith under the applicable state law, and in states that permit extracontractual damages, a successful plaintiff may recover not only the unpaid claim amount but also litigation costs and punitive damages, and bad faith insurance counsel defending against a bad faith claim must evaluate whether the company's claim decision was supported by a reasonable investigation and a colorable legal basis for the denial and whether the company's claims handling file demonstrates that the claim was handled promptly and fairly in accordance with the applicable unfair claims settlement practices requirements.

The Federal Insurance Office established by the Dodd-Frank Act has the authority to monitor the insurance industry, recommend that certain large insurers be designated as systemically important financial institutions, and preempt state insurance laws that are inconsistent with covered agreements, and Dodd-Frank compliance counsel advising on federal insurance oversight must evaluate whether the company's size and interconnectedness make it a candidate for SIFI designation and whether any state laws applicable to the company's business might be subject to federal preemption under a covered agreement.

The IAIS has developed the Insurance Capital Standard intended to apply to internationally active insurance groups, and U.S. .nsurers that operate globally need to understand how the ICS will interact with existing U.S. .tate-based capital requirements, and corporate compliance and risk management counsel advising on insurance regulatory compliance in the context of international capital standards must evaluate whether the company's capital resources satisfy the ICS requirements in addition to the applicable RBC requirements and whether any legal or operational restructuring of the group would improve its capital efficiency under both frameworks.