Insurer’s inability to pay debts. Insurance insolvency standards and the regulatory actions taken vary from state to state.
When regulators deem an insurance company is in danger of becoming insolvent, they can take one of three actions: place a company in conservatorship or rehabilitation if the company can be saved or liquidation if salvage is deemed impossible. The difference between the first two options is one of degree – regulators guide companies in conservatorship but direct those in rehabilitation.
Typically the first sign of problems is inability to pass the financial tests regulators administer as a routine procedure.
See Liquidation; Risk-based capital