Insurance regulations reduce number of Colo. insolvencies

A risk-based capital rule put in place to prevent insolvencies of health-insurance companies appears to be working.
How it operates: If a health-insurance company invests in something such as mutual funds, for example, it also must have a minimum set aside in nonrisk securities. The risk-based capital regulations are intended to create an early-warning system to alert state regulators to possible problems in the insurance industry.
A surge of insurance-industry insolvencies in the mid to late 1980s made regulators sit up and take notice. But since regulations were approved by the National Association of Insurance Commissioners and adopted in Colorado in 1992, there has been only one insolvency, said Beverly Day, chief of financial affairs for the Colorado Division of Insurance.
"The figures are declining," Day said. "The numbers were much higher several years ago."
Also in place now is a risk-based capital formula designed to protect insurance companies from unexpected loses. At the same time, a state statutory deposit fund in place since 1913 has more than $230 million in reserves.
"We have reserve funds to guarantee that people˜s claims will be paid if the money stops coming in the door," said Neil Westergaard, media director for Blue Cross Blue Shield Colorado. "It is a reserve against unexpected loss."
Before risk-based regulations came on the scene, insurance companies were required to invest in low-risk investments, such as Treasury bills, certificates of deposit and bonds.
"Insurance companies were required to have money in admitted assets, which did not have inflationary growth," said James Hertel, editor of the Colorado Managed Care newsletter in Denver. "But insurance companies complained that they needed to go into more risky investments to make money."
National rules approved in 1992 were adopted right away for life and property casualty insurance. Health insurers have now been added to the list.
"NAIC has established a risk-based capital requirement, and they are testing it for health insurers," said Bill Crossen, chief financial officer for Blue Cross Blue Shield of Colorado. "They already have the requirement in place for life and property casualty insurance. The health insurers have a complex formula that involves percentages and square roots. But in order to do business in Colorado, you have to meet minimum requirements for capital and surplus or stock holder˜s equity."
Formula factors include four basic components:
n Asset risk: If health insurers invest in Treasury bonds, it˜s considered a low risk. Real estate is considered a greater risk.
n Interest-rate risk: This depends on the duration of assets invested. The greater the risk of the investment, the higher the surplus requirement.
n Type of business: State requirements differentiate types of business within a company. Paying insurance claims is considered a risk part of the business.
n General business risk: This is measured by the level of administrative cost. Larger companies have more administrative costs, but businesses that are run efficiently might have lower administrative costs.
"The third component is the largest and clearly the most risk for a company," Crossen said.
The state insurance commissioner oversees risk-based capital regulations for almost 1,500 insurance companies operating in Colorado. The state has 89 incorporated insurance companies and 1,391 "foreign" insurance companies (incorporated in other states, but regulated by Colorado.)
"In risk-based capital, the company has to maintain a minimum of capital and surplus, and this must show up on the balance sheets of each insurance company," Day said.