3 Minute Read
Posted by Michael Bradburn on December 26, 2017

#3 - Senior Life Settlement Anatomy 101

The State Insurance Department

The State Insurance Department is a most vital department in each of our fifty states and Puerto Rico. The Departments perform regular audits, review complaints from consumers and oversee mergers of companies which do business within its boundaries.

Required Reserves Ensure Payment of Policyholder Benefits

A large percentage of each premium dollar calculated by actuaries for each company goes into the policy owner's reserve fund. The reserve liabilities are established as financial safeguards to ensure the company will have sufficient assets to pay its claims and other commitments when they fall due. Life companies that comply with the legal reserve requirements established by the state insurance laws are known as legal reserve life insurance companies.

Risk-Based Capital (RBC)

The RBC measures the amount of capital required to meet different elements of risk, including asset, interest rate, insurance and business risk(s). A company reporting total adjusted capital of 200% or more is considered within acceptable levels. RBC ratios of 300-350% are common in the industry. Companies whose RBC ratios fall below 200% fall under regulatory controls by the state insurance departments.

Periodic Company Examinations

Every year, all legal reserve life insurance companies submit annual statements to the insurance departments of each state in which they are licensed to do business. The format and contents of the forms used are prescribed by the State Insurance Commissioners and they are a detailed report of an insurance company's financial status that is important in evaluating the company's solvency and compliance with the insurance laws.

Additional Security Safeguards

1. Reinsurance

Nearly every legal reserve life insurance company further protects its policyholders by reinsuring part of the coverage with a life reinsurance company. Reinsurance prevents relatively sizable claims from depleting a company's policy holder reserves.

2. Surplus

The surplus is the amount by which a company's assets exceed its liabilities. The surplus protects the policyholders and third parties against any deficiency in the insurer's provisions for meeting its obligations.

3. Mergers

In the unlikely event that a company's annual statement or its own examination reveals possible financial weakness, one of several avenues is open to the company:

1. Produce additional operating capital

2. Sell its business to another life company

3. Merge into another financially stable life company

A legal reserve life insurance company simply does not close its doors and go out of business declaring that all policies are null and void. Legal reserve life insurance policyholders enjoy personal security safeguards unknown by other types of business.

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