The public wants solvent insurers who are financially able to make good on the promises they have made, so financial regulation is a high priority for insurance regulators. All types of insurers operating in Oregon, including all health insurers offering individual or group health insurance, are subject to financial regulation. Certain federal programs, such as Medicare, also rely on state regulators to ensure the solvency of insurers.
The division uses a variety of tools and metrics, explained below, to monitor the health of insurance companies.
Minimum capital and surplus requirements
Financial regulation begins with the division's initial decision about whether to license an insurer to do business in Oregon and continues with ongoing financial reviews of licensed companies. The Insurance Code requires a minimum of $3 million of capital and surplus when a newly formed insurer first becomes authorized to transact insurance and $2.5 million of capital and surplus on an ongoing basis. Capital and surplus is the amount a company's assets exceed its liabilities. The required minimum increases as the company assumes more insurance risk.
Risk-based capital (RBC) standards
The division uses technical standards established by the National Association of Insurance Commissioners (NAIC) to evaluate insurer solvency and financial stability. The NAIC is made up of insurance regulators from all 50 states, the District of Columbia, and the five U.S. territories. Its solvency standards are used throughout the country and are known as risk-based capital (RBC) standards. RBC measures the minimum amount of capital appropriate for a company to support its overall business operations based on its size and risk profile. These amounts and values are confidential and cannot be disclosed by the division per ORS 731.752.
A health insurer's RBC is calculated by using a formula focusing on the following five major risk categories:
- Asset risk, affiliates — the risk a company's investments in affiliates will incur material losses
- Asset risk, other — the risk of default of principal or interest payments and market value fluctuations
- Underwriting risk — the risk of underestimating existing policyholder obligations or inadequately pricing business to be written in the coming year
- Credit risk — the risk of recovering receivables
- Business risk — the general risk of operating a business
These factors generate a dollar amount that represents a minimum level of capital and surplus needed to maintain solvency. The adequacy of an insurance company's capital and surplus is evaluated by comparing the company's total adjusted capital and surplus with its RBC requirement. The resulting RBC ratio is used to determine if regulatory intervention is necessary. It is not used to set maximum or target capital and surplus levels. The division is required to take certain actions, including exercising control of an insurer if its RBC ratio is at or below 200 percent. Under certain circumstances, such as a company losing money, the division has authority to act if the company's RBC ratio is between 200 percent and 300 percent.
While these RBC levels set a minimum regulatory requirement, a company near these levels is barely above financial hardship. The rating organizations that grade the financial status of insurance companies and help determine the companies' financial viability typically expect higher RBC levels. Financial regulators strongly prefer similar cushions, particularly for nonprofit insurers that do not have the same access to capital markets as for-profit insurers.
Examinations and monitoring
The review of a company's financial soundness and compliance with statutes and recordkeeping standards is carried out primarily through the financial examination and analysis process. A financial examination of an Oregon-domiciled insurer occurs on site and consists of an in-depth financial review. By law, these examinations must be conducted at least once every five years. However, the Division of Financial Regulation has the authority to examine a company any time the DCBS director determines an examination is necessary. The financial analysis process involves an in-house desk audit of an insurer's annual and quarterly statements, supplemental filings, and other financial information.
The ability of a company to meet its obligations to policyholders is ultimately the responsibility of insurance company management. When the division identifies potential solvency issues, it contacts company management to explain its concerns and to obtain information regarding the steps management will take to satisfy those concerns. Once company management implements these steps, the division monitors the outcome. If steps taken by management do not improve operating results and adequate surplus cannot be maintained, the division may decide that regulatory action, including supervision, rehabilitation, or even liquidation, is necessary.