The California Insurance Commissioner files a verified application showing that an insurer's further transaction of business would be hazardous to its policyholders. The court vests the insurer's assets in the Commissioner, who takes possession and conducts the business. This proceeding is called:

Why A is correct

Under California Insurance Code Section 1011, when an insurer is in hazardous financial condition or otherwise meets the statutory grounds, the superior court may vest title to the insurer's assets in the Insurance Commissioner, who takes possession as conservator and conducts the business to protect policyholders. Conservation is a protective remedy aimed at preserving or rehabilitating the company, in contrast to liquidation, which winds the company down and sells its assets. The Commissioner acts under court order throughout the proceeding and may manage the business, examine records, and take steps to cure the insurer's difficulties. This protects policyholders from abrupt loss of coverage while the company's condition is assessed.

Why the other options are wrong

• B) Liquidation is the winding up and sale of a failed insurer's assets to pay claims; conservation, by contrast, seeks to preserve and continue the business under the Commissioner's control.
• C) Reinsurance is the transfer of risk between insurers in the ordinary course of business, not a regulatory proceeding over an impaired company. Reinsurance is a commercial arrangement between insurers, not a state proceeding for handling a financially troubled company.
• D) Demutualization converts a mutual insurer into a stock company and distributes ownership to policyholders; it has nothing to do with conserving an impaired insurer. Demutualization is a voluntary corporate restructuring, while conservation is a court-supervised remedy imposed to protect policyholders of an impaired insurer.

Memory hook

Conservation = the Commissioner steps in to keep a sinking insurer afloat, not to bury it.