In accordance with s. 623.11, Wis. Stat., the Commissioner of Insurance has determined that additional clarification is necessary to ensure the solvency of the insurers authorized to write property and casualty business in the state. The Office of the Commissioner of Insurance (OCI) regulates the financial solvency of insurers at an individual entity level. In the event of insolvency, circumstances at the individual entity level determine the financial resources that are accessible and the amount that policyholders and claimants may receive for their claims in excess of their particular state guaranty association's limits of coverage. Under all states' receivership laws, reinsurance claims are subordinate to the claims of direct claimants and policyholders. Therefore, to ensure a sufficient margin of safety on the part of licensed property and casualty insurers, OCI will require insurers to maintain a reasonable relationship between direct premiums written and surplus, such that the ratio of direct premium written to surplus may not exceed 800%, effective December 31, 2016.
For property and casualty insurers authorized to write business in Wisconsin and subject to s. 623.11, Wis. Stat., except for financial guaranty, mortgage guaranty, and title insurers, the ratio of direct premium written to surplus may not exceed 800%, where direct premium written is the numerator and surplus as regards policyholders is the denominator, unless both of the following apply:
- The insurer is a direct or indirect wholly owned subsidiary of the affiliated insurer (hereinafter, the parent insurer) that either manages the affiliated reinsurance pool to which it cedes 100% of its net retained business after any cessions to non-affiliates or to which it cedes under a 100% quota share reinsurance agreement; and
- The parent insurer is licensed to transact business in this state.
If such an insurer is licensed in Wisconsin and does not have, or intends to maintain, sufficient capital and surplus to have a direct premium written to surplus ratio of less than 800%, the insurer will not be able to write business in this state unless its parent insurer agrees to contribute sufficient capital or surplus to allow its wholly owned subsidiary to achieve and maintain an 800% direct premium to surplus ratio. The parent insurer will need to agree, through a written Stipulation with OCI, to provide and maintain sufficient funding of the capital and surplus of the individual insurer if any of the following events arise:
- The parent insurer has a net loss, as reported on its most recent financial statement filed with the National Association of Insurance Commissioners (NAIC), and the parent insurer's surplus as regards policyholders either (i) decreased by 25% or more from the amount reported as of the same date in the previous calendar year or (ii) decreased by 10% or more in each of two consecutive twelve-month periods; or
- The NAIC's Insurance Regulatory Information System (IRIS) test for the one-year reserve development to surplus ratio calculated for the parent insurer's reserves is deficient by 10% or more for two consecutive calendar years; or
- The NAIC's IRIS test for the two-year reserve development to surplus ratio calculated for the parent insurer's reserves is deficient by 10% or more for two consecutive calendar years; or
- The parent insurer's NAIC IRIS tests for the one-year reserve development to surplus ratio or the two-year reserve development to surplus ratio indicates any deficiency in reserves in either or both ratios in three consecutive calendar years; or
- The parent insurer's NAIC IRIS test for the two-year overall operating ratio exceeds 100% for three consecutive calendar years; or
- The parent insurer's NAIC IRIS test result for the adjusted liabilities to liquid assets ratio exceeds 100% and the parent insurer's ratio of net cash from operations to surplus is less than or equal to -5% in any calendar year; or
- The parent insurer's NAIC Risk Based Capital (RBC) ratio calculated based on its most recent financial statement filed with the NAIC, where total adjusted capital is the numerator and authorized control level risk-based capital is the denominator, declines to less than a ratio stipulated to OCI, but in no event less than 400%; or
- The subsidiary insurer ceases to cede, after any reinsurance cessions to non-affiliates, 100% of its net retained business to its parent insurer under either a reinsurance pooling agreement or a 100% quota share reinsurance agreement approved by OCI; or
- The parent insurer ceases to hold a certificate of authority from the state of Wisconsin.
- Any other events that OCI deems relevant to an insurer's solvency.
A nondomestic insurer, as a condition of licensure, that does not have or intend to maintain sufficient capital and surplus to maintain at least an 800% direct premium written to surplus ratio shall agree to notify OCI within ten (10) days following the notice provided to its state of domicile of any proposed change in control, merger, consolidation, dissolution, change of domicile, or any suspension or termination of a certificate of authority by any jurisdiction in the United States. OCI will evaluate the transaction described in the notice to determine sufficiency of capital and surplus and may require the insurer parent to contribute sufficient capital or surplus to achieve and maintain an 800% direct premium written to surplus ratio in order to continue operations in the state.
OCI does not intend to limit the number of subsidiaries to which a parent insurer may provide backing under this alternate system of financial security. However, OCI expects that a parent insurer is financially able to fulfill all its obligations, including funding agreements stipulated to OCI. Accordingly, the parent insurer must demonstrate, on an on-going basis, its ability to support any and all insurance affiliates which are licensed, or are in the process of pursuing a license in this state, which do not have or intend to maintain sufficient capital and surplus to maintain at least an 800% direct premium written to surplus ratio. OCI will determine the parent insurer's ability to financially support any affiliate in accordance with this guidance through a pro-forma calculation of the parent insurer's policyholders' surplus. The calculation will start with the parent insurer's policyholders' surplus, reduced first by 25% and then further reduced by the amount necessary to fund all of its insurance affiliates licensed in this state in order for the affiliates to attain at least an 800% direct written premium to surplus ratio. The parent insurer's pro-forma policyholders' surplus must exceed Wisconsin's security surplus requirements. This calculation must be performed on an annual basis and be filed with OCI not later than 45 days after the end of a calendar year, or within 30 days of a request for such information should such request be made by OCI.
In offering this accommodation of a parent insurer providing a conditional guaranty of the capital and surplus on behalf of direct or indirect wholly owned subsidiary insurers that are fully reinsured by the parent insurer, OCI is by no means suggesting that an 800% direct premium written to surplus ratio is ideal or that a conditional guaranty is necessarily the best course of action under such circumstances. Instead, it is offered as a minimum acceptable course of action. OCI is willing to discuss alternative courses of action that any insurance holding company system in these circumstances may propose to reasonably address protection of policyholders, creditors and the general public. Any alternative course of action to address a shortfall in the minimum direct premium written to surplus requirement of 800% that may be ultimately agreed between any insurer and OCI shall be a matter of public record.
Any questions concerning this bulletin should be directed to
ocifinancial@wisconsin.gov.