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NAIC ASKED TO CONSIDER NEW SOLVENCY PROTECTION: SAFE-T SYSTEM WOULD REQUIRE QUALITY ASSET SET-ASIDE TO COVER UP-TO-DATE LOSS RESERVES

NAIC ASKED TO CONSIDER NEW SOLVENCY PROTECTION: SAFE-T SYSTEM WOULD

REQUIRE QUALITY ASSET SET-ASIDE TO COVER UP-TO-DATE LOSS RESERVES
 WASHINGTON, June 8 /PRNewswire/ -- Requiring property and casualty insurance companies to set aside enough high quality assets with a bank trustee would help minimize losses due to insolvencies and identify impending insolvencies according to two former state insurance regulators.
 Under the new solvency protection measure, called SAFE-T (Solvency and Financial Enforcement Trust), property and casualty insurers would have to deposit cash or marketable securities equal to their insurance liabilities with a bank fiduciary. The amount in the SAFE-T account would be determined each year by an insurance company's certified loss reserves as reported in the already required annual financial condition report.
 An insurer would retain control over trading activities within the account, but any withdrawal from the account would require affirmative approval of the company's home state regulator. This means that companies with positive cash flow would be meeting their obligations with ongoing operating revenues while those experiencing negative cash flow might need to seek approval for a reduction in the SAFE-T account.
 The evaluation report on SAFE-T, authored by former Illinois Insurance Directors Philip O'Connor (1979-82) and Zack Stamp (1989- 91) was prepared at the request of State Farm.
 The two former regulators, who delivered the report at the meeting of the National Association of Insurance Commissioners (NAIC) being held in Washington, conclude that "SAFE-T constitutes the next logical step in the progress of solvency regulation in an increasingly complex and risky insurance market."
 They further advised the nation's insurance regulators that SAFE- T could be implemented immediately and without substantial costs." The report identifies six criteria of solvency regulation along which progress has been made during the past 25 years. O'Connor and Stamp characterize the SAFE-T proposal as "fostering continued advancement by state insurance regulators along the six dimensions."
 The report concludes that the basic SAFE-T proposal corresponds to the six dimensions as:
 -- flexible rather than rigid.
 -- prospective rather than retrospective.
 -- self-executing rather than intrusive.
 -- reliant on computer-based surveillance.
 -- targeted on reserve adequacy rather than numerous indirect
 financial indicators.
 -- efficient in the use of limited regulatory resources because
 it enlists the fiduciary role of banks.
 O'Connor and Stamp analyze potential points of debate about the SAFE-T proposal, including extension to cover the life industry, coverage of such additional liabilities as unearned premium and the possibility that SAFE-T might be offered by some as an excuse to defer consideration of risk-based capital standards.
 The authors conclude that none of the likely criticisms undermine the basic value of SAFE-T, but may well provide grounds for various refinements and improvements.
 O'Connor and Stamp also conclude that there would be no basis for the likely criticism that many insurers would have difficulty complying with SAFE-T requirements. They report that a computerized review of 1991 annual statement data for Illinois domiciled P&C companies with $5 million or more in premium indicates that fewer than 10 companies would be unable to promptly meet the standards.
 In addition, they write, "it should be plainly stated that any firm chronically unable to comply must be regarded as a candidate for insolvency."
 Finally, O'Connor and Stamp recommend SAFE-T to the state regulators as a strong predictor of financial weakness. A review of 36 P&C insolvencies since 1989 shows that SAFE-T requirements would have been violated in half the cases in the second or third year prior to the declaration of insolvency.
 "SAFE-T would have obliged regulatory action to halt the assumption of new or renewal business by these companies because an inability to fund the SAFE-T account would serve as a 'red alert' for regulators and company management," they said.
 -0- 6/8/92
 /CONTACT: Phil O'Connor, 312-807-4848, or Zack Stamp, 217-525-0700, both for State Farm/ CO: State Farm ST: District of Columbia, Illinois IN: INS SU:


KD-DC -- DC020 -- 8025 06/08/92 15:11 EDT
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Publication:PR Newswire
Date:Jun 8, 1992
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