Managed Healthcare Executive - February 2009 - (Page 8) { LETTER OF THE LAW } whether the company is adequately capitalized. One key nancial ratio is the ratio of premiums to surplus. As a general rule, a company’s net retained premiums on an annualized basis should not exceed 400% of its Measurement tools used by state total capital and surplus. regulatory bodies will evaluate The most common measurement of reMCOs’ capitalization quired capitalization now used by regulators is the National Association of Insurance ComBY BARRY SENTERFITT missioners (NAIC) Risk-Based Capital (RBC) formula. This formula is now in e ect in most states. It requires a company to compare its tohe meltdown in nancial services intal capital and surplus, with certain prescribed adjustments, to a formulaic calculation of capidustries is being viewed as a product of tal required for the company. regulatory failures. Congress and various The RBC formula takes into consideration federal regulators already have indicated that the company’s asset mix, lines of business, and new, tighter regulations are coming. This volume of business. The resulting calculation backlash on the regulatory front will ultiis referred to as the “Authorized Control Level” mately lter down to similarly situated inRBC. If the company’s adjusted capital is less dustries—those that are entrusted with large than 100% of the Authorized Control Level sums of money from the public. Thus, there RBC, regulators may intervene and place will be a renewed interest in solvency reguthe company under control. If the company’s lation for insurance companies and MCOs. adjusted capital is between 100% and 150% At this juncture, we will review the of Authorized Control Level RBC, regulacurrent panoply of regulatory tools used to tors will require the company to take correcevaluate the nancial condition of health tive actions to improve its nancial condition. insurers, HMOs and other MCOs. This In most cases, a company will be considered oversight function is performed by state inBarry Senter tt is a partner su ciently capitalized if its adjusted capital in surance regulatory bodies. in the insurance industry comparison to the Authorized Control Level practice of Akin Gump Strauss Hauer & Feld LLP TOOLS OF THE TRADE RBC is 250% or above. in the rm’s Austin, Texas, Solvency regulation begins with requireIn addition to the tools regulators have to of ce. ments for minimum capital and surplus. evaluate capitalization levels, there are signi Typically, most states will have a minimum cant limitations on the investments that are statutorily required level of capitalization. permitted for these regulated entities. Generally This requirement may range from a low of speaking, most of their assets must be invested $1 million to as high as $10 million dependin highly liquid securities. ing on the state of incorporation and the Finally, regulators also have oversight on lines of business to be written. It must be dividends and distributions and may disapmaintained at all times or the regulated enprove of such payments that are deemed to be tity is otherwise viewed as being “impaired.” “extraordinary.” In most states, annualized diviIf impaired, the regulatory body in its state dends that exceed the greater of 10% of capital of incorporation will take action to supervise and surplus or net income are deemed extraorits activities with its own personnel on site dinary. If determined to be extraordinary, such or seize control of the company and displace dividends require regulatory approval. MHE management. State regulators also look at various This column is written for informational purposes nancial ratios and formulas for determining only and should not be construed as legal advice. Financial services meltdown means tighter solvency control T 8 FEBRUARY 2009
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